Economic Terms

The field of economics can be further broken down into two separate divisions, microeconomics and macroeconomics. Macroeconomics is concerned with the economy as a whole. Microeconomics focuses on exchanges and decisions between entities. Health care economics falls into the later branch of economics, focusing on exchanges between physicians, insurance companies, hospitals, and patients. The basic ideologies of economics can be applied to the health care industry and used as a means to assess opportunities when allocating resources.

Opportunity costs and diminishing marginal returns are two basic principles that assist with efficient resource allocation n the health care field. Resources Resources are materials, capital, or persons who can be utilized to complete a purpose (Business Dictionary, 2010). In health care, resources include medical supplies, medical personnel, and capital inputs. Medical supplies consist of items such as patient gowns, medications, and syringes. Medical personnel include physicians, nurses, administrative staff, and technicians.

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Hospitals, ambulatory surgery centers, other health care facilities, and medical equipment can be categorized as capital inputs. The patients are the consumers who need health care services offered by the physicians, the producers. The goal of efficient resource allocation is to meet the infinite demands of the consumers with limited supplies. Economics allocates resources in a perfectly competitive market. However, health care operates in an imperfect market, one in which there is an offering of a diverse product with no fixed market price.

The cost of services varies for consumers, suppliers, and third-party payers. The goal of health care economics and economics is the same, to obtain the most from available resources (Scott II, Solomon, & McGowan, 2001). Diminishing Marginal Returns Utility refers to the benefit someone experiences from utilizing a product or revive. In the case of health care, it would refer to the health off patient. The law of diminishing marginal returns states that as inputs are increased, the output point where the benefit of each additional service will diminish.

The maximum benefits are acquired by driving to the point “at which rising marginal costs equal falling marginal benefits” (Gotten, 2007-). The product curve plateaus as medical care utilization increases, as a result decreased benefit. The law of diminishing marginal returns allows health care to identify processes to maximize resources and producing services that are meeting consumer demands. Opportunity Costs Health economics is focused on costs but in terms of opportunity costs. Opportunity cost refers to the value of an opportunity that is passed on to engage the limited resources in an alternative activity.

For example, pharmaceutical research is imperative in health care to afford consumers improved medications. The opportunity cost of no research would be to remain stagnant and have patient build up immunity to the existing medications with no alternatives. An additional example of opportunity cost would be when a hospital administrator decides to move nurses from one department that is not as productive to one that is very busy. The non- productive department’s output is the opportunity cost for allocating resources to the busier department.

Opportunity cost is fundamental in understanding microeconomics and the resource allocation decisions. Summary The study of economics and health care economics operate on the same fundamental principles. The ultimate goal of economic analysis is to efficiently allocate resources to maximize the results. Health care services and products are complex and dependent on a variety of factors. The health care market is does not have a fixed market price, therefore, economic value of resources is measured in ERM of opportunity costs.