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Supply and demand

       Main article: Supply and demand

The supply and demand model describes how prices vary as a result of a balance between
product availability and demand. The graph depicts an increase (that is, right-shift) in
demand from D1 to D2 along with the consequent increase in price and quantity required
to reach a new equilibrium point on the supply curve (S).

The theory of demand and supply is an organizing principle to explain prices and
quantities of goods sold and changes thereof in a market economy. In microeconomic
theory, it refers to price and output determination in a perfectly competitive market. This
has served as a building block for modeling other market structures and for other
theoretical approaches.

Health economics
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Health economics is a branch of economics concerned with issues related to scarcity in
the allocation of health and health care.

Four factors that are important to Health Economics: Government Intervention,
Uncertainty, Asymmetric Knowledge, and Externalities.[1] Governments tend to heavily
regulate the Healthcare industry and also tend to be the largest payor within the market.
Uncertainty is intrinsic to health, both in patient outcomes and financial concerns. The
knowledge gap that exists between a physician and a patient creates a situation of distinct
advantage for the physician, which is called Asymmetric Knowledge. Finally, there are
many effects that happen between two parties without monetary compensation, called
externalities, within healthcare, from catching a cold from someone to practicing safe

The scope of health economics is neatly encapsulated by Alan William's "plumbing
diagram"[2] dividing the discipline into eight distinct topics:

      what influences health? (other than health care)
      what is health and what is its value
      the demand for health care
      the supply of health care

        micro-economic evaluation at treatment level
        market equilibrium
        evaluation at whole system level; and,
        planning, budgeting and monitoring mechanisms.

What influences health? Health of a country or the residence of that country is greatly
dependent not only on the geographic location but the legal and economic stabilities of
the nation. With healthcare industry having such a major impact on the economy of a
nation(roughly 10%), it becomes the indispensable attention of all governments.

A stable legal policy not only aids in the on time improvement of the industry but its
impact on the society as well.The exclusive government body focussed on the industry
enhances the research and development along with the underpinning infrastructure


        1 What is health and what is its value?
        2 Health care demand
        3 The supply of health care
            o 3.1 Micro-economic evaluation at treatment level
        4 Market equilibrium
            o 4.1 Health care markets
            o 4.2 Competitive equilibrium in the five health markets
            o 4.3 Ideological bias in the debate about the financing and delivery health
            o 4.4 Evaluation at a whole system level
            o 4.5 Planning, budgeting, and monitoring mechanisms
        5 Other issues
            o 5.1 Medical economics
        6 References
        7 Further reading
        8 See also
        9 External links

What is health and what is its value?
        Private goods
        Public goods
        Merit goods

Health care demand
The demand for health care is a derived demand from the demand for health, more
generally. Health care is demanded as a means for consumers to achieve a larger stock of
"health capital." The demand for health is unique, because individuals allocate resources
in order to both consume and produce health.

Michael Grossman's 1972 model of health production has been extremely influential in
this field of study and has several unique elements that make it notable. The model views
each individual as both a producer and a consumer of health, as measured in "health
stock" or health capital, the flow of which is known as health status. It acknowledges that
health care is both a consumption good that yields direct satisfaction and utility, and an
investment good, which yields satisfaction to consumers indirectly (more productive,
fewer sick days, higher wages, etc.) Since individuals in this model demand health care
only as a result of their desire to increase their health stock, health care demand is a
derived demand. The model takes into account health production (investments in health
such as time spent exercising, money spent on medical care, etc.) as well as the
production of non-health goods against the overall utility that results from ones
investments. These factors are used to determine the optimal level of health that an
individual will demand, taking into account the marginal cost of health capital and
depreciation rates.

The optimal level of investment in health occurs where the marginal cost of health capital
is equal to the marginal benefit resulting from it (MC=MB). With the passing of time,
health depreciates at some rate δ. The general interest rate in the economy is denoted by
r. The marginal cost of health capital can be found by adding these variables: . The
marginal benefit of health capital is the rate of return from this capital in both market and
non-market sectors. In this model, the optimal health stock can be impacted by factors
like age, wages and education. As an example, increases with age, so it becomes more
and more costly to attain the same level of health capital or health stock as one ages. Age
also decreases the marginal benefit of health stock. The optimal health stock will
therefore decrease as one ages.[3]

When studying Health Care, it is beneficial to reference the fundamental laws of Supply
and Demand. Health Care, just like anything else, is a finite resource. This is to say,
Health Care is a scarce resource - whether one lives in a society in which Health Care is
privitized or publicized. In either scenario, demand for Health Care will be high.
Logically, demand will increase more if Health Care is made a Public Good (see
Universal Health Care). There are positives and negatives to such a system. The most
obvious positive is the fact that everyone can receive care.

However, what also must be noted is the fact that Universal Health Care will cause a
spike in the Demand for it. Being a scarce resource, sacrifices are usually made. This is
the main reason why there can be such long waits in a public Health Care system -
quality health care is diverted to those who can afford to wait in line the longest.

This is not to say that a privatized Health Care policy does not have its flaws. Health
insurance in the United States is largely a case of market failure. A large reason for this is
asymmetrical information. Someone applying for health insurance knows more about
their health than the insurance company does (see adverse selection and moral hazard).
People who have health care may act more recklessly than if they didn't have it resulting
in higher costs for the insurance company. Someone who applies for health insurance as
an individual will usually pay higher rates than group plans for an equal level of
insurance. Statistically, people who apply individually are more likely to need health care
than those with group plans. Healthy people can't get health care via a group plan are
more likely to go without any insurance at all. The higher rates for individuals and the
low risk of a healthy person needing medical treatment that costs more than their
deductible makes insurance more expensive than its worth. Thus individuals are
perceived as more risky, individual plans are made more expensive and the rate of
healthy people falls further as they decide that it isn't worth the expense.

The supply of health care

Micro-economic evaluation at treatment level

A large focus of health economics, particularly in the UK, is the microeconomic
evaluation of individual treatments. In the UK, the National Institute for Health and
Clinical Excellence (NICE) appraises certain new and existing pharmaceuticals and
devices using economic evaluation.

Economic evaluation is the comparison of two or more alternative courses of action in
terms of both their costs and consequences (Drummond et al.). Economists usually
distinguish several types of economic evaluation, differing in how consequences are

      Cost minimisation analysis
      Cost benefit analysis
      Cost-effectiveness analysis
      Cost-utility analysis

In cost minimisation analysis (CMA), the effectiveness of the comparators in question
must be proven to be equivalent. The 'cost-effective' comparator is simply the one which
costs less (as it achieves the same outcome). In cost-benefit analysis (CBA), costs and
benefits are both valued in cash terms. Cost effectiveness analysis (CEA) measures
outcomes in 'natural units', such as mmHg, symptom free days, life years gained. Finally
cost-utility analysis (CUA) measures outcomes in a composite metric of both length and
quality of life, the Quality Adjusted Life Year (QALY). (Note there is some international
variation in the precise definitions of each type of analysis).

A final approach which is sometimes classed an economic evaluation is a cost of illness
study. This is not a true economic evaluation as it does not compare the costs and
outcomes of alternative courses of action. Instead, it attempts to measure all the costs

associated with a particular disease or condition. These will include direct costs (where
money actually changes hands, e.g. health service use, patient co-payments and out of
pocket expenses), indirect costs (the value of lost productivity from time off work due to
illness), and intangible costs (the 'disvalue' to an individual of pain and suffering). (Note
specific definitions in health economics may vary slightly from other branches of

Market equilibrium

] Health care markets

The five health markets typically analyzed are:

      Healthcare financing market
      Physician and nurses services market
      Institutional services market
      Input factors market
      Professional education market

Although assumptions of textbook models of economic markets apply reasonably well to
health care markets, there are important deviations. Insurance markets rely on risk pools,
in which relatively healthy enrollees subsidize the care of the rest. Insurers must cope
with "adverse selection" which occurs when they are unable to fully predict the medical
expenses of enrollees; adverse selection can destroy the risk pool. Features of insurance
markets, such as group purchases and preexisting condition exclusions are meant to cope
with adverse selection.

Insured patients are naturally less concerned about health care costs than they would if
they paid the full price of care. The resulting "moral hazard" drives up costs, as shown by
the famous RAND Health Insurance Experiment. Insurers use several techniques to limit
the costs of moral hazard, including imposing copayments on patients and limiting
physician incentives to provide costly care. Insurers often compete by their choice of
service offerings, cost sharing requirements, and limitations on physicians.

Consumers in health care markets often suffer from a lack of adequate information about
what services they need to buy and which providers offer the best value proposition.
Health economists have documented a problem with "supplier induced demand",
whereby providers base treatment recommendations on economic, rather than medical
criteria. Researchers have also documented substantial "practice variations", whereby the
treatment a patient receives depends as much on which doctor they visit as it does on
their condition. Both private insurers and government payers use a variety of controls on
service availability to rein in inducement and practice variations.

The U.S. health care market has relied extensively on competition to control costs and
improve quality. Critics question whether problems with adverse selection, moral hazard,
information asymmetries, demand inducement, and practice variations can be addressed

by private markets. Competition has fostered reductions in prices, but consolidation by
providers and, to a lesser extent, insurers, has tempered this effect.

Competitive equilibrium in the five health markets

While the nature of healthcare as a private good is preserved in the last three markets,
market failures occur in the financing and delivery markets due to two reasons: (1)
Perfect information about price products is not a viable assumption (2) Various barriers
of entry exist in the financing markets (i.e. monopoly formations in the insurance

Ideological bias in the debate about the financing and delivery health

The healthcare debate in public policy is often informed by ideology and not sound
economic theory. Often, politicians subscribe to a moral order system or belief about the
role of governments in public life that guides biases towards provision of healthcare as
well. The ideological spectrum spans: individual savings accounts and catastrophic
coverage, tax credit or voucher programs combined with group purchasing arrangements,
and expansions of public-sector health insurance. These approaches are advocated by
health care conservatives, moderates and liberals, respectively.

Evaluation at a whole system level

Planning, budgeting, and monitoring mechanisms

Other issues

Medical economics

Often used synonymously with Health Economics Medical economics, according to
Culyer,[4] is the branch of economics concerned with the application of economic theory
to phenomena and problems associated typically with the second and third health market
outlined above. Typically, however, it pertains to cost-benefit analysis of pharmaceutical
products and cost-effectiveness of various medical treatments. Medical economics often
uses mathematical models to synthesise data from biostatistics and epidemiology for
support of medical decision making, both for individuals and for wider health policy.