Economics is a field of study that deals with analyzing the factors involved in the production, distribution and consumption of goods and services. Economics strives to explain how economies of different countries function and the interaction between different agents operating in those economies. Economics as a field of study finds application in different spheres of the society including businesses, governments, health, education, politics and other social institutions. There are two major categories in this field and they include microeconomics and macro economics.
Microeconomics and Macroeconomics
Micro economics is the branch of economics that deals with the basic elements of the economy. It deals with understanding individual firms and markets. The main focus of microeconomics is studying individual consumers which might include firms, buyers and sellers. It focuses on how costs and benefits affect individual decision making, and these costs can be in the form of financial or opportunity costs.
Macroeconomics on the other hand aims to understand the economy as a whole and does not focus on individual markets. It deals with broad and general aspects of the economy by focusing on income and investments affect a country economy. It therefore considers aggregates like the Gross Domestic Product, GDP, unemployment, inflation, national income and consumption and international trade. Macroeconomics further tries to understand long term growth and the major factors like change in technologies, accumulation of capital and growth of labor, which affect this growth.
Elasticity and Inelasticity
Elasticity is the ratio of the change in percentage in one variable when compared to another change in another variable. Elasticity is an economic tool that is used to measure the responsiveness of a function to change as a proportionate increase in demand as a result of a decrease in prices. Some of the most frequently used elasticities are those of demand, supply, income and substation. Inelasticity occurs when there is lack of responsiveness to the changes, that is, a fall in price does not lead to changes demand. Elasticity finds useful application in understanding economic issues related indirect taxation, wealth distribution, consumer choice and surplus.
Gross Domestic Product, GDP
Gross Domestic Product is the amount of goods and services that a country produces in a year in a particular country. GDP can be used as a good indicator to analyze how a country is performing on the economic level. It is therefore used to gauge the economic performance of a country. The GDP can be arrived through either the income or expenditure method. Income method is arrived at adding up what everyone earns while the total expenditures are added up when using the expenditure method.
History and Evolution of Health care Economics
Healthcare economics is a branch of economics which is concerned with understanding issues related to scarcity when it comes to allocating health and health care. Generally, health care economics is concerned with studying the functions of the health care system and behaviors that result of social and private causes. Health care economics has undergone drastic changes over the course of time in the United States. The changes can be attributed to the revolutionary changes that have been witnessed in the US especially in the areas of advanced technology and medical care. Understanding the history of health care economics is vital because it enables financial managers to adequately prepare for the future through identification of flow of funds (Rebelo, 2007). The subject of health care economics started to gain much prominence after the Second World War when the health sector experienced unprecedented levels of expansion, rationalization and organization. This state of events led to the redefinition of health care as a “state of complete physical, mental and social wellbeing and not merely the absence of disease” (WHO, 1947). With this change in definition, a social context was introduced to health and began to be seen as the ability to survive within the environment and everyday life. This saw the creation of various health care financing entities notably Medicare and Medicaid.
The need to ensure scientific advancement and promotion of standards, ethics and improved public health occurred when the American Medical Association (AMA) was created in the mid 19th century. However, the economic concerns in health care became a key agenda in 1930 after the formation of the Bureau of Medical Economics under the AMA. The bureau was mandated with studying all the economic matters affecting the medical profession. President Roosevelt approved the Social Security Act in 1935 and it was meant to provide insurance to those who were unemployed. Early efforts to provide universal health insurance by the likes of Truman were thwarted by the AMA which consistently campaigned against it. Truman was concerned by the fact that there was an immense gap in the structure of social security, hence making it difficult to provide adequate health care to the population. With numerous funds from interest-groups, the AMA in the cold war era was able to attack the proposals which it termed as being communistic. It was only in the 1960’s when a national health care policy to cater for older patients. The policy served as a foundation for the establishment of Medicare. It was also during this time that economics started making incursions in issues related to health.
Selma Mushkin was one of the pioneer people who started defining health economics. In her book published in 1959 and entitled “Towards a Definition of Health Economics”, she attributed the recently acquired interest in health care economics on the advances in medical techniques that were being witnessed and also the resulting problems brought about the costs of financing medical care. Health care economics started to be viewed as a broad science that was concerned with optimizing the use scarce resources in the economy to take care of the sick and promote health taking into account the competitive use of the resources. She further noted that it is through investment in health services and education that people are able to develop themselves and secure their future. From this point, the subject of health economics started gaining wider recognition.
It can be further argued that the subject of health care economics was launched at the same time as that of Education Economics and other applied fields. These subjects utilized the Human capital Theory to try and rationalize economic issues related to health and education. However, there have been other schools of thought which have attributed the birth of health care economics to the Rational/ Social theory and this was profoundly put across in 1963 by the major theorist in this field, Kenneth Arrow.
The Rational Choice Theory was a new science of decision making and it was the key theory employed by the United States to tactically and strategically deal with the cold war with the Soviet Union. Game theory as part of the rational approach became to be applied as a new approach to coming up with optimal solutions to human actions in strategic cases that were uncertain without resorting to conventional optimization problems dealing with allocation of scarce resources. Game theory therefore became the new approach of studying human interactions in different fields ranging from the social to the biological sciences and even to decision making in political and military issues. Use of game theory soon found application in domestic policy making in the health department. Medicare, which was part of President Jackson’s ‘Great Society’ programmes, was a product of this model and soon the model became a key application in policy decisions and analysis on both foreign and domestic matters. The Rational Choice theory was viewed as the best in understanding health care issues because it was not based on any ideology but scientific principles and therefore the best when it came to addressing policy questions related to equity and distributive fairness o health programmes.
Beginning in the 1970’s health care economics began to be evaluated based on the predictive value of a model and not the explanatory one based on perfect competition. This was a rational model based on Friedman’s philosophy. Wittington (2008) said that Arrow further applied the rational theory to the health care industry through the redefinition of Pareto optimal equilibrium on health markets. To him, this theory ensured that welfare was maximized even at the expense of sacrificing some self-interest, as long as the few losses would be used to compensate the benefits earned by the greater majority. The justification for the application of Pareto’s theory is that it was necessary that the government intervened since it would to inequitable health care in the absence of intervention.
In conclusion, health care economics started and was developed and refined under the protective shadow of rational choice theorists, in this was accelerated in the post cold war period through the support of various organizations like the RAND and Ford Foundation.
Rebelo, L. (2007). The Origins and the Evolution of Health Economics: a discipline by
itself? Led by economists, practitioners or politics? New York: Routledge
Whittington, R. (2008). Introduction to Health Economics: A Beginners Guide. Chicago: