Download Chapter 14 Economic Theories

Chapter 14
Economic Theories
Introduction
• Public health care reforms are often at odds with
the realities of government economic policies.
• Nurses should understand economic arguments
put forth to better understand the benefits and
pitfalls of proposed reforms.
• Competition in health care is particularly
problematic because economic principles of
competition are often misapplied.
History and Beginnings of Mainstream
Economics (1 of 3)
• Modern economic thought developed as society
industrialized and sought to understand exchange of
scare resources.
• Scarcity is the key component of economics and
means having too few resources to satisfy the needs
and wants of humankind.
• Without scarcity, the science of economics would not
exist because there would be no need to make
choices or tradeoffs.
History and Beginnings of Mainstream
Economics (2 of 3)
• Choices made to overcome scarcity via
alternatives are of particular interest to
economists.
• Contemporary economics can be broadly
divided into two fields:
– Microeconomics: Behaviors in individual markets and
small economic units to understand their behavior
within the market
– Macroeconomics: The “big picture” market that
consider aggregate functions of all markets
History and Beginnings of Mainstream
Economics (3 of 3)
• Health care economics is a recently developed
specialized field and is differentiated by the level
of government intervention, intractable
uncertainty, asymmetrical information, and
externalities it involves.
• Uncertainties in particular lead to inefficient
resource allocation in health care that forces nonmarket institutions to compensate for
inequalities.
Assumptions of Economic Theory
• Classical economic theory is familiar to advance
practice nurses in the form of social exchange
theory.
• Social exchange theory adapts assumptions
about economic exchange relations to human
interactions in all social contexts.
• Along with scarcity, rational behavior is the
major assumption of social exchange theory.
Concepts, Relationships, and Principles in
Economic Theories: Markets
• Markets are the means by which buyers and sellers
engage in trade.
• Consumers attempt to maximize utility based on
preference and price.
• Producers attempt to maximize profit based on
their mix of input and output.
• Market theory dictates that, at a certain point, the
market achieves competitive equilibrium based on
allocative efficiency.
Production Possibility Curve
• The production possibility curve measures the
quantities of two goods that may potentially
be produced and represents the trade-offs
between them.
• Opportunity cost is associated with this tradeoff and represents the consequence of scarcity
that, when resources are used to produce one
product, they are not available to produce
another.
Demand
• Demand is the quantity a buyer is willing to
buy at various prices.
• Represented by a demand curve that shows
how, as price goes up, the quantity demanded
goes down.
• A shift in the demand curve represents a
change in demand based on a change in price.
Reasons for Demand Shift
• Shifters are factors other than price that
influence the quantity demanded:
– Normal goods: Demand varies directly with
income
– Inferior goods: Demand varies inversely with
income
– Substitutes: Demand for the original increases as
it is replaced
– Complements: Demand for the complement
decreases as price of related goods increases
Utility
• Utility is the pleasure or satisfaction a
consumer derives from a good or service.
• Marginal utility is the addition to the total
utility that consuming one more unit of a good
or services brings to the individual.
• The law of diminishing marginal utility states
that as consumption increases, marginal utility
decreases.
Supply
• Supply is the quantity of a good or service that
producers are able and willing to sell at a
particular price.
• Represented by a supply curve that shows
how, as demand changes, supply changes.
• A shift in the supply curve represents a change
in supply based on a change in demand.
Reasons for Supply to Shift
• Changes in the prices of inputs and
technology are the two primary shifters of the
supply curve.
• Change in supplier number or capacity and
price to produce related goods also function
as shifters.
Equilibrium
• Equilibrium is achieved when demand for and
supply of a product are equal.
• Graphically represented by the intersection point
of the supply and demand curves.
• Disequilibrium occurs when quantities supplied
and demanded do not balance:
– Surplus: Quantity is greater than demand
– Shortage: Demand is greater than quantity
• Disequilibrium is corrected through market
forces.
Elasticity
• Elasticity is change in demand and supply in
response to change in price and income.
• A price elasticity demand ratio greater than
one represents price elastic demand.
• A price elasticity demand ratio less than one
represents price inelastic demand.
• The same relationships hold true for supply
elasticity and income elasticity.
Market Failure
• Market success assumes that consumers can
maximize their benefits and suppliers can
maximize their profits under existing conditions.
• In failed markets, competition is flawed,
consumers and producers do not make optimal
choices, and resources are not used optimally.
• Allocation and cost control are not realized.
Assessing Assumptions for Validity
• Rationality is impacted by people’s perceptions of
benefits, status, and the public good associated with
a purchase.
• Decisions are often made based on incomplete
information and inferior knowledge of the impact of
decisions.
• Supplier-induced demand and monopolies further
compound decision making and challenge the
validity of rationality as an economic assumption.
Economic Analysis of Clinical and
Managerial Interventions
• Increases in health care costs and efforts to control
them have increased the relevance of economic
analysis of clinical interventions.
• Goal is to achieve identical outcomes at smaller cost
increases.
• Disease prevention, self-care, and treatment are
promoted to achieve this goal.
• Further analysis and application of business
economic concepts will yield new ideas.
Cost Analysis (1 of 3)
• Cost analysis involves three tasks:
– Clarifying the perspective taken
– Identifying the resources used
– Identifying the opportunity cost of those
resources
• Relevant costs depend on stakeholders.
• To capture costs, construction of a clinical
pathway and understanding of the
interventions involved are key.
Cost Analysis (2 of 3)
• Cost may be direct or indirect and can be
divided into three categories:
– Cost of the intervention
– Cost borne by patients
– Costs borne by the rest of society
• Cost of illness studies estimate the total
monetary effects of a specific disease or
condition.
Cost Analysis (3 of 3)
• Cost of minimization analyses identify the
expected costs of two options and show that
their outcomes are at least equal.
• Cost-benefit analyses compare benefits in terms
of disease prevention within the cost of a
program.
• Cost-effectiveness analyses calculate ratios that
measure outcomes in health units and cost of
intervention in dollars.
Summary
• Economic theory informs health care
economics.
• New economic ides about behavior, selfinterest, and sustainability are challenging
traditional ideas of rationality, greed, and
equilibrium.
• These changes will prove beneficial to health
care economics and improve the efficiency
and equity of health care.