Health markets Flashcards
What is a free market?
Simple supply and demand.
In a free market the price is determined by how much supply there is and how much demand.
Optimal allocation is when supply= demand, and the price is at the equilibrium.
What are the two actors involved in an economic market?
Consumers: These are assumed to be utility maximisers, unlimited wants but scarcity of money, so they will pay the price that reflects the goods benefit (Marginal benefit)
Sellers: These are assumed to be profit maximisers, and the price reflects the cost to produce the good (marginal cost)
Optimal market when the marginal cost=marginal benefit. This dictates the price therefore.
The invisible hand impact in a free market?
Price and quantity act as signals to direct the market towards equilibrium.
If demand increases, price increases, more producers move into the market so supply increases, price therefore decreases again.
Or if supply increases, price decreases, more demand until again supply=demand.
Health economics involves which two points of view?
Positive: Fact driven e.g. ‘the elderly have very high medical expenses.
Normative: Value judgement driven, e.g. ‘therefore, we should subsidise their healthcare’.
Why do we need health economics?
Because the demands are unlimited, but the money and resources are finite. Therefore, decisions need to be made for what to fund.
A free market fails in the case of healthcare, therefore economic evaluation is needed.
What is different about health as a good?
- No exchange value. Health is not a good you can trade, but is produced through healthcare.
- Equity of health, people care about the health of others, equal opportunity for health? (normative judgements)
- Health has a value beyond itself, it enables other actvities such as leisure, employment, and a good investment for future health.
- Uncertainity -subject to external shocks e.g. sudden heart attack which you can’t prepare for.
- production and consumption affects others e.g. vaccination has positive impact on others.
- We as consumers have a lack of expertise, therefore we rely on agents (Doctors) to advise us, and health economists to say if the good is cost effective.
What two things in healthcare allocation need to be balanced?
Efficiency: Max benefit
Equity: Fairness of provision- hard to measure. (normative judgements)
E.g. a screening programme that is very efficient but likely to make the healthy healthier and the more deprived/less educated less likely to go? Hard to balance up. And those that strive for equity are often less efficient.
What are the two types of efficiency that need evaluating?
Technical efficiency: For a given objective, what is the best way to achieve this? Given a fixed resource.
Allocative efficiency: Should resources be allocated to this? Does it increase societal well-being, ethics?
What is opportunity cost?
Because money/resources are finite, the choice to fund one intervention / buy a good, this means that next best option will be forgone. This is the opportunity cost.
E.g. To fund a new cancer treatment costs £50,000 but saves 400 lives, say a cystic fibrosis drug costing £50,000 that only saves 360 lives will be forgone.
What is the definition for economic evaluation?
What questions are economic evaluations aiming to answer?
Basic task of economic evaluation is to identify, measure, value and compare the costs and consequences of the alternatives under consideration i.e. efficiency
The questions we ask are:
How much more are we paying for an additional unit of benefit if we use the new alternative?
Are we as a society willing to pay that much (if it is more than for existing care)?
We are interested in the opportunity cost of a new intervention
Assumptions for a perfect competitive market? (7)
- Rational, self-interested consumer & profit maximising sellers
- Many sellers and buyers with no market power
- Sellers can easily enter and leave the market
- Perfect knowledge
- Certainty
- Homogenous product
- No externalities or spillovers
What is meant by the assumption of “rational consumers and profit-maximising suppliers”?
Consumers are rational in maximising their utility by only buying goods where the marginal benefit out weights/ weighs up to the marginal cost.
Sellers will then supply goods to the maximum price that the consumers will pay.
Consumers have some control over the market, e.g. if a product is not wanted, they dont buy, the product is withdrawn.
How is the market assumption of “rational consumers and suppliers” violated in healthcare?
Rational consumers- the consumers have no concept of a price to pay for healthcare services due to a lack of knowledge. Maximising price is also a violation of equity, if only well off people can afford a drug its not very fair.
What is meant by the assumption of “lots of sellers and buyers”?
Lots of sellers and buyers with no individual market power. E.g. if only a few buyers (oligopoly) or 1 pharma company for a patented drug (monopoly) can artificially set the price high. E.g. a few oil companies. Competition keeps prices low and encourages high quality products.
How is the market assumption of “lots of sellers and buyers” violated in healthcare?
The supply is limited by drug patents- meaning that only one pharma company will provide a certain drug, no competition, but without would be no innovation. Only one main healthcare provider/buyer e.g. NHS. (monopsony)
Also the limiting of doctor training affects demand as having to wait for a doctors appointment deters non-important demand.
