APT 2 Complete summary of literature
Analyse the Economic Context of Health(care) Innovation
HIM0002
,Learning community meeting 1: Determinants of
demand for health services and products
Introduction to Health Economics
by Guinness & Wiseman, based on the structure and contents.
Chapter 1 – Key Concepts in Health Economics
This chapter lays the foundation for understanding how economics applies to health care:
Scarcity & Opportunity Cost: Health systems have limited resources (staff, beds,
drugs). Choosing one allocation (e.g., more ICU beds) means sacrificing another (e.g.,
preventive programs). Opportunity cost is central in every health policy decision.
Efficiency vs. Equity: Efficiency is about maximizing outcomes with available resources
(getting the “best value for money”). Equity is about fairness in distribution of resources
and access to services. These often trade off: for example, reaching rural populations
may be less efficient but improves equity.
Utility & Preferences: People derive “utility” (satisfaction) from health and care
services. Health economics examines how these preferences shape demand and policy
priorities.
Market Failures: Unlike standard markets, health care faces failures—information
asymmetry (patients rely on doctors’ expertise), externalities (vaccination benefits
others), uncertainty, and moral hazard (insurance reduces incentives to avoid risk).
Role of Government: Because of these failures, governments step in to regulate,
finance, or directly provide health care.
Takeaway: Health economics is not just about costs—it’s about making tough choices under
scarcity, balancing efficiency with fairness, and addressing unique features of health care
markets.
Chapter 3 (pp. 37–46, 49) – A Simple Model of Demand
This section explains how demand theory applies to health care, with key points:
Individual Choice Framework: People make health care decisions based on
preferences, income, and prices. Demand curves represent the relationship between
price and quantity demanded.
Determinants of Demand:
o Price of health services – higher prices reduce demand (but often less strongly
than other goods).
, o Income – as income rises, demand for health care may increase, especially for
higher-quality care.
o Preferences & attitudes – culture, education, and health beliefs strongly shape
demand.
o Substitutes & complements – e.g., over-the-counter medicine as a substitute
for GP visits; health insurance as a complement.
Elasticity of Demand:
o Price elasticity – measures how sensitive demand is to price changes. Health
care demand is often inelastic (people still seek care even if cost rises),
especially in emergencies.
o Income elasticity – for basic health services, elasticity may be low (necessary
goods), but for premium services, elasticity is higher.
Health Care Peculiarities: Unlike normal goods, demand is influenced by doctors’
decisions, insurance coverage, and uncertainty. Patients rarely know what care they
need, so demand depends on provider guidance.
Moral Hazard: With insurance, patients may consume more services than necessary
since they don’t bear the full cost.
Takeaway: Demand for health care doesn’t follow classic market patterns. Elasticities are lower,
preferences are shaped by culture and knowledge, and provider influence is huge.
Chapter 4 (pp. 55–60) – Measuring Demand
This section builds on demand theory by focusing on how to quantify demand in practice:
Elasticities in Action:
o Price elasticity: Empirical studies often show values between –0.1 and –0.4 for
health care (meaning a 10% rise in price reduces demand by only 1–4%).
Preventive care tends to be more price-sensitive than urgent care.
o Income elasticity: Often positive but <1, meaning health care is a “necessity”
rather than a luxury. Richer people spend more, but proportionally less as
income rises.
Cross-Price Elasticity: Examines substitution/complementary effects. For example, if
GP consultation costs rise, patients may substitute with ER visits or alternative
medicine.
Applications:
o Estimating demand elasticities helps policymakers predict effects of fee
changes, co-payments, or insurance expansions.
, o Example: Introducing small co-payments may reduce unnecessary GP visits but
risks reducing needed visits too.
Limitations:
o Health care demand is often estimated indirectly because patients don’t make
pure price–quantity choices. Insurance, gatekeeping systems, and provider-
driven care complicate measurement.
o Studies must carefully distinguish between revealed demand (observed
behavior) and true need.
Takeaway: Measuring demand requires tools like elasticity, but because of health care’s unique
features, interpreting these numbers for policy is complex and context-specific.
Analyse the Economic Context of Health(care) Innovation
HIM0002
,Learning community meeting 1: Determinants of
demand for health services and products
Introduction to Health Economics
by Guinness & Wiseman, based on the structure and contents.
Chapter 1 – Key Concepts in Health Economics
This chapter lays the foundation for understanding how economics applies to health care:
Scarcity & Opportunity Cost: Health systems have limited resources (staff, beds,
drugs). Choosing one allocation (e.g., more ICU beds) means sacrificing another (e.g.,
preventive programs). Opportunity cost is central in every health policy decision.
Efficiency vs. Equity: Efficiency is about maximizing outcomes with available resources
(getting the “best value for money”). Equity is about fairness in distribution of resources
and access to services. These often trade off: for example, reaching rural populations
may be less efficient but improves equity.
Utility & Preferences: People derive “utility” (satisfaction) from health and care
services. Health economics examines how these preferences shape demand and policy
priorities.
Market Failures: Unlike standard markets, health care faces failures—information
asymmetry (patients rely on doctors’ expertise), externalities (vaccination benefits
others), uncertainty, and moral hazard (insurance reduces incentives to avoid risk).
Role of Government: Because of these failures, governments step in to regulate,
finance, or directly provide health care.
Takeaway: Health economics is not just about costs—it’s about making tough choices under
scarcity, balancing efficiency with fairness, and addressing unique features of health care
markets.
Chapter 3 (pp. 37–46, 49) – A Simple Model of Demand
This section explains how demand theory applies to health care, with key points:
Individual Choice Framework: People make health care decisions based on
preferences, income, and prices. Demand curves represent the relationship between
price and quantity demanded.
Determinants of Demand:
o Price of health services – higher prices reduce demand (but often less strongly
than other goods).
, o Income – as income rises, demand for health care may increase, especially for
higher-quality care.
o Preferences & attitudes – culture, education, and health beliefs strongly shape
demand.
o Substitutes & complements – e.g., over-the-counter medicine as a substitute
for GP visits; health insurance as a complement.
Elasticity of Demand:
o Price elasticity – measures how sensitive demand is to price changes. Health
care demand is often inelastic (people still seek care even if cost rises),
especially in emergencies.
o Income elasticity – for basic health services, elasticity may be low (necessary
goods), but for premium services, elasticity is higher.
Health Care Peculiarities: Unlike normal goods, demand is influenced by doctors’
decisions, insurance coverage, and uncertainty. Patients rarely know what care they
need, so demand depends on provider guidance.
Moral Hazard: With insurance, patients may consume more services than necessary
since they don’t bear the full cost.
Takeaway: Demand for health care doesn’t follow classic market patterns. Elasticities are lower,
preferences are shaped by culture and knowledge, and provider influence is huge.
Chapter 4 (pp. 55–60) – Measuring Demand
This section builds on demand theory by focusing on how to quantify demand in practice:
Elasticities in Action:
o Price elasticity: Empirical studies often show values between –0.1 and –0.4 for
health care (meaning a 10% rise in price reduces demand by only 1–4%).
Preventive care tends to be more price-sensitive than urgent care.
o Income elasticity: Often positive but <1, meaning health care is a “necessity”
rather than a luxury. Richer people spend more, but proportionally less as
income rises.
Cross-Price Elasticity: Examines substitution/complementary effects. For example, if
GP consultation costs rise, patients may substitute with ER visits or alternative
medicine.
Applications:
o Estimating demand elasticities helps policymakers predict effects of fee
changes, co-payments, or insurance expansions.
, o Example: Introducing small co-payments may reduce unnecessary GP visits but
risks reducing needed visits too.
Limitations:
o Health care demand is often estimated indirectly because patients don’t make
pure price–quantity choices. Insurance, gatekeeping systems, and provider-
driven care complicate measurement.
o Studies must carefully distinguish between revealed demand (observed
behavior) and true need.
Takeaway: Measuring demand requires tools like elasticity, but because of health care’s unique
features, interpreting these numbers for policy is complex and context-specific.
