Pharmacoeconomics

For 5 Year Under Graduate

th

Pharmacy Students`

November, 2024
 1. Introduction

1.1Introduction to Principles of Economics.

2
Objectives of the lesson
 At the end of this session , students should be able to
understand well the basic concepts of economics
understand the ten principles of economics

3
Definitions
. . . The word economy comes from a Greek word
―oikonomos‖, which means for ―one who manages a
household.
• Economy- A system where scarce resources are
allocated among alternative uses
• Households and economies have much in common.
•A household must allocate its scarce resources among its
various members, taking into account each member’s
abilities, efforts, and desires.

4
 Definitions…
 Like a household, a society faces many decisions.
◦ A society must decide what jobs will be done and who
will do them.
• The management of society’s resources is
important because resources are scarce.
• Scarcity = the limited nature of society’s resources
Scarcity means that society has limited resources and
therefore cannot produce all the goods and services
people wish to have.

5
 Definition…
Scarcity implies choice and choice implies cost.
 Economics: the study of how society manages its
scarce resources.
 Economics: the study of how people use scarce
resources to meet unlimited demand.

6
 Definition…
 In most societies, resources are allocated not by an all-
powerful dictator but through the combined actions of
millions of households and firms.
 Economists therefore study how people make decisions:
how much they work, what they buy, how much they save,
and how they invest their savings.
 Economists also study how people interact with one
another.

7
 Definition…
 For instance, they examine how the multitude of buyers
and sellers of a good together determine the price at
which the good is sold and the quantity that is sold.
 Economists also analyze forces and trends that affect the
economy as a whole, including
–the growth in average income,
–the fraction of the population that cannot find work, and
–the rate at which prices are rising.

8
 Utility
 Utility
is the amount of satisfaction to be obtained from a
good or service at a particular time.
◦ For example the utility of orange is the satisfaction derived from
consuming it at a particular time.
 Some points to note:
i. whether a good is useful or not, so far it gives satisfaction
to the consumer, it has utility for him.
ii. If a consumer wants something whether it is good or bad
for him it has utility for him.
 it may satisfy socially immoral wants E.g. Drug, alcoholism, etc.

9
 Utility…
iii. Utility of a good varies from person to person and it
varies for the same person from time to time.

10
 Value
 Is the worth of a commodity in relation to other
commodities.
 In economics, the value of a commodity is understood as
how much the commodity is worth relative to other
commodities to an individual
 Value of a commodity is evaluated in terms of its
worth(valuation) or assessed in terms of its value in the
market (price).

11
 Value…
 The concept of value is important in answering key
questions in business like:
 why goods and services are priced as they are,
 how the value of goods and services comes about, and
 how to calculate the correct price of goods and services.
 Value is intrinsically related to the worth derived
by the consumer.
This measure of worth is based purely on the utility derived
from the consumption of a product or service
 Price:
The numerical monetary value that is assigned to a
commodity in the market.
12
 Micro vs Macroeconomics
Microeconomics:
 Is the area of economics that evaluates how individuals,
households, and firms within the large economic system
make decisions to allocate limited resources to fulfill
unlimited wants
 Encompasses the study of behavior of individual
economic units within the whole economic system.

13
 Micro vs Macroeconomics…
Macroeconomics:
• Involves the study of sum total of economic activity as
result of the functioning of the entire economic system.
 When individual economic units interact and perform
they create the economic system as a whole.
 This system acts as both a result as well as a cause of
economic behavior and decisions of individual economic
units.
 This study places particular emphasis on national income
and macroeconomic aggregates, and also develops
economic performance measures, economic growth, and
international economics.
14
 TEN PRINCIPLES OF ECONOMICS
A household and an economy face many decisions:
 Who will work?
 What goods and how many of them should be produced?
 What resources should be used in production?
 At what price should the goods be sold?

15
 TEN PRINCIPLES…
 Economists study
 How people make decisions
 How people interact with each other
 The forces and trends that affect the economy as a whole

16
 TEN PRINCIPLES…
HOW PEOPLE MAKE DECISIONS
1. People face trade-offs.
2. The cost of something is what you give up to get it.
3. Rational people think at the margin.
4. People respond to incentives.

17
 TEN PRINCIPLES…
How People Interact
5. Trade can make everyone better off.
6. Markets are usually a good way to organize economic
activity.
7. Governments can sometimes improve economic
outcomes

18
 TEN PRINCIPLES…
How the Economy as a whole Works
8. The standard of living depends on a country’s
production.
9. Prices rise when the government prints too much
money.
10. Society faces a short-run tradeoff between inflation
and unemployment.

19
Principle #1: People Face Trade-offs.
 ―There is no such thing as a free lunch!‖

 Making decisions requires trading off one goal

against another.
20
Principle #1…
 Trade-off-a technique of reducing or forgoing one
or more desirable outcomes in exchange for
increasing or obtaining other desirable outcomes in
order to maximize the total return or effectiveness
under given circumstances.

21
Principle #1…
 Toget one thing, we usually have to give up
another thing that we like.
◦ Food vs. clothing
◦ Leisure time vs. work

22
 Principle #1…
 Efficiency v. Equity
◦ Efficiency means society gets the most that it can from
its scarce resources.
◦ Equity means the benefits of those resources are
distributed fairly among the members of society.
 Often, when government policies are designed ,these two
goals conflict.

23
 Principle #2: The Cost of Something Is
What You Give Up to Get It.
 Because people face trade-off, making decisions
require comparing costs and benefits of alternative
courses of action.
◦ Whether to go to college or to work?
◦ Whether to study or go out on a date?
◦ Whether to go to class or sleep in?
 The opportunity cost of an item is what you give up
to obtain that item.

24
Principle #2…
 Basketball star LeBron
James understands
opportunity costs and
incentives. He chose to
skip college and go
straight from high
school to the pros
where he earns
millions of dollars.

25
 Principle #3: Rational People Think at the
Margin.
 Rational people often make decisions by comparing
marginal benefits and marginal costs.
 They systematically and purposefully do the best
they can to achieve their objectives, given the
opportunities they have.
 Marginal changes are small, incremental adjustments
to an existing plan of action.

26
 Principle #3…
Example: Whether to sell water or diamond to make
your own business?
 Because water is plentiful, the marginal benefit of an
additional plastic of water is small.
 Because diamonds are rare, the marginal benefit of an
extra diamond is high.
 Costs associated with both alternatives(water and
diamond) also affects decision to make

27
 Principle #4: People Respond to
Incentives.
 An incentive is something (such as the prospect of a
punishment or a reward) that induces a person to act.
 Marginal changes in costs or benefits motivate people to
respond.
 The decision to choose one alternative over another
occurs when that alternative’s marginal benefits exceed its
marginal costs!
 Eg, basketball star, L.James

28
 Principle #4…
•Because rational people make decisions by weighing
costs and benefits, their decisions may change in
response to incentives.
◦ When the price of a good rises, consumers will buy
less of it because its cost has risen.
◦ When the price of a good rises, producers will
allocate more resources to the production of the
good because the benefit from producing the good
has risen.

29
TEN PRINCIPLES…

HOW PEOPLE INTERACT

5. Trade can make everyone better off.
6. Markets are usually a good way to organize
economic activity.
7. Governments can sometimes improve
economic outcomes.

30
 Principle #5: Trade Can Make Everyone
Better Off.
 Trade is not like a sports competition, where one side
gains and the other side loses.
 People gain from their ability to trade with one another.
 Consider trade that takes place inside your home:
 Your family is likely to be involved in trade with other families
on a daily basis.
 Most families do not build their own homes, make their own
clothes, or grow their own food.

31
 Principle #5…
 Trade between two countries can make each country
better off.
 Trade allows for specialization in products that countries
/families/people can do best.
- Blacksmith vs. farmer

32
Principle #6: Markets Are Usually a Good
Way to Organize Economic Activity.
• Market - Is a set of arrangements where by buyers and
sellers exchange goods and services at various prices.
• A market economy is an economy that allocates resources
through the decentralized decisions of many firms and
households as they interact in markets for goods and
services. for example:
◦ Households decide what to buy and who to work for.
◦ Firms decide who to hire and what to produce.

33
 Principle #6…
 Many countries that once had centrally planned
economies have abandoned this system and are trying to
develop market economies.
 In communist countries, prices were not determined in
the marketplace but were dictated by central planners.
◦ These planners lacked the information that gets reflected in prices
that are free to respond to market forces.

34
 Principle #6…
 Central planners failed because they tried to run
the economy with one hand tied behind their
backs—the invisible hand of the marketplace.
 Invisible hand- unobservable market force that
helps the demand and supply of goods in a free
market to reach equilibrium

35
 Economic systems
 An economic system describes how a country’s
economy is organized
 An economic system must answer three (3) basic
questions…
 WHAT TO PRODUCE?
 What kinds of goods and services should be produced?
 HOW TO PRODUCE?
 What productive resources are used to produce goods and
services?
 FOR WHOM TO PRODUCE?
 Who gets to have the goods and services?
36
Economic systems…
• The way these questions are answered determines the
type of economic system. Accordingly economic
systems can be classified as:
 1.Traditional Economy
 2. Command Economy
 3. Market Economy
 4. Mixed Economy (Market + Command)

37
 1.Traditional Economy
 An economic system in which economic decisions are
based on customs and beliefs
 People will make what they always have made and will do
the same work their parents did.
 exchange of goods is done through bartering (trading
without using money)

38
 1.Traditional Economy…
 Who decides what to produce?
 people follow their customs and make what their
ancestors made
 Who decides how to produce goods & services?
 people grow & make things the same way that their
ancestors did
 For whom are the goods and services produced?
 people in the village who need them
Examples:
 villages in Africa and South America
 Inuit tribes in Canada

39
Command System

 government makes all economic decisions & owns

most of the property
 governmental planning groups determine such things
as the prices of goods/services & the wages of
workers
 This system has not been very successful & more and
more countries are abandoning it.

40
Command economy..

 Who decides what to produce?

 government makes all economic decisions
 Who decides how to produce goods and services?
 government decides how to make goods/services
 For whom are the goods and services produced?
 whomever the government decides to give them to

41
Market Economy
• Also known as Capitalism, Free Market, or Free
Enterprise
 an economic system in which economic decisions are
guided by the changes in prices that occur as individual
buyers and sellers interact in the market place
 Based on what the people want and how much
they’re willing to pay.
 most of the resources are owned by private citizens
 economic decisions are based on free enterprise
(competition between companies)
 little government interventions

42
 Market Economy…
 Who decides what to produce?
 businesses base decisions on supply and demand and
free enterprise
 Who decides how to produce goods and services?
 businesses decide how to produce goods
 For whom are the goods and services produced?
 consumers

43
 Mixed Economy
 Market + Command = Mixed
 There are no pure command or market economies.
 To some degree, all modern economies exhibit
characteristics of both systems and are often referred to
as mixed economies.
 Businesses own most resources and determine what and
how to produce, but the government regulates certain
industries.

44
Mixed Economy…
 Who decides what to produce?
 businesses
 Who decides how to produce goods and services?
 businesses, but the government regulates certain
industries
 For whom are the goods and services produces?
 consumers

45
 Principle #7: Governments Can
Sometimes Improve Market Outcomes.
 Reasons for a government to intervene in the economy:
 To ensure the individual’s property rights
Property rights are the ability of an individual to own and
exercise control over a scarce resource.
Markets work only if property rights are enforced.
 to promote efficiency and
 to promote equity.

46
 Principle #7…
 When the market fails (breaks down) government can
intervene to promote efficiency and equity.
 Market failure -a situation in which a market left on its
own fails to allocate resources efficiently
 Market failure may be caused by:
i). Market power: which is the ability of a single person (or
small group) or firm to unduly influence market prices.

47
Principle #7…
II. Externalities:
• An externality refers to the uncompensated impact
of one person/firm’s actions on the well-being of a
bystander.
• Externalities cause markets to be inefficient, and
thus fail to maximize total surplus.
• An externality arises...
. . . when a person/firm engages in an activity that
influences the well-being of a bystander and yet neither
pays nor receives any compensation for that effect.
48
Principle #7…
• When the impact on the bystander is adverse,
the externality is called a negative externality.
– Automobile/factory exhaust
– Improper use of pesticides
– Cigarette smoking
– Loud stereos in an apartment building

49
Principle #7…
• When the impact on the bystander is beneficial,
the externality is called a positive externality.
– Vaccinations and herd immunity
– Restored historic buildings
– Research into new technologies

50
PRIVATE SOLUTIONS TO
EXTERNALITIES
 Government action is not always needed to
solve the problem of externalities.
 Private solutions include
◦ Moral codes and social sanctions
◦ Charitable organizations
◦ Contracting between parties

51
PUBLIC POLICY SOLUTIONS TO
EXTERNALITIES
 When externalities are significant and private
solutions are not found, government may
attempt to solve the problem through . . .
◦ command-and-control policies.
◦ market-based policies.

52
PUBLIC POLICY SOLUTIONS TO
EXTERNALITIES
 Command-and-Control Policies
◦ Usually take the form of regulations:
 Forbid certain behaviors.
 Require certain behaviors.
◦ Examples:
 Requirements that all students be immunized.
 Stipulations on pollution emission levels set by the
Environmental Protection Agency (EPA).

53
PUBLIC POLICY SOLUTIONS TO
EXTERNALITIES
• Market-Based Policies
– Government uses taxes(corrective taxes meant to
reduce the supply, increase the price, and reduce
the quantity demanded to a more socially optimal
level)
– subsidies to align private incentives with social
efficiency.

54
Principle #8: A Country’s Standard of Living
Depends on Its Ability to Produce Goods and
Services.

Standard of living may be measured in different ways:

By comparing personal incomes.
By comparing the total market value of a nation’s
production.
Differences in standard of living between countries or
even provinces is attributable to the differences in
productivity of the country or provinces.
Productivity is the amount of goods and services
produced from each hour of a worker’s time.

55
Principle #9: Prices Rise When the Government
Prints Too Much Money.
 Inflationis an increase in the overall level of prices in the
economy.
 One cause of inflation is the growth in the quantity of
money.
 When the government creates large quantities of money,
the value of the money falls.

56
 Principle #9…
In Germany in January 1921,
 a daily newspaper cost 0.30 marks.
 Less than 2 years later, in November 1922, the same
newspaper cost 70,000,000 marks.
 This episode is one of history’s most spectacular examples
of inflation.
 Deflation?

57
Principle #10: Society Faces a Short-run Trade-off
between Inflation & Unemployment.

 The primary long run effect of increasing the quantity

of money is elevating level of price.
 But the short-run story is more complex and more
controversial.

58
 Principle #10…
 Most economists describe the short-run effects of
monetary injections as follows:
 As amount of money in the market increases, the
personal spending may increase because of ―buy now, it
will cost more later‖ attitudes.
 Demand for goods and services then
 Higher Demand causes firms to raise prices and hires
more workers to produce more goods
 More hiring mean lower unemployment
 Therefore, there is a short term trade off b/n inflation
and unemployment.
59
Assignment
 Why do health care markets fail? ~ Why health
care market is different from traditional
competitive markets?
 Define what deflation is and discuss its causes
and consequences.

60
Thank u!

61