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ECO440H5 Chapter Notes -Utopia, Social Welfare Function, Opportunity Cost

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Phillips CH. 1
-aside from the short-term political controversies, there is a more fundamental issue taxing the
minds of all governments in the developed world – that of what has been termed the health
service dilemma.1–3 This health service (or health care) dilemma is part of a wider economic
problem that characterises every area of society and affects individuals, organisations,
communities, societies, economies and the global community. The attempts to deal with the
problem in relation to health and health care, to reduce its magnitude and effects, and achieve a
closer fit between the supply of services and demand for health care provision provide an
underlying theme for this book. It is important to emphasise that there is no single correct
answer or solution to the problem and that health economics has the ability to deliver utopia or
at least move things in such a direction.
- in the UK the number of people aged 80 and over will virtually double over the next 25 years or
increasing from around 2.5 million (4% of population) in 2005 to nearly 5 million by 2031 (7.6%
of population) and to 11% of the population by 2071. In contrast, the number of people in the
working-age population in 2005 stands at 38 million (64% of total) but is set to fall to 59% of the
total by 2031 (38 million) and 57% of the total in 2071 (37 million).
(38 million) and 57% of the total in 2071 (37 million).4
-In terms of health expenditure in the UK, for example, £67.2 billion was spent on the National
Health Service (NHS) in 2002, equivalent to £1200 per person, compared to £3 billion 30 years
ago, which was equivalent to £58 per person. There are now over 1.2 million employees in the
NHS, a figure which has doubled over 40 years.5 The additional resources have reaped their
rewards, witnessed, for example, by the improvements in life expectancy
- However, it should be remembered that more does not necessarily mean better health care,
and diverting additional resources into health care facilities and services will not automatically
generate an improvement in the health of the population
What is Economics?
-opportunity cost
-resource allocation
- The market, in economic terms, comprises a demand side – based on consumers’ wants and
desires, supported by an ability to pay for the particular commodity, and a supply side – based
on producers’ aim to generate profit, and the interaction between them. Markets operate
according to price signals,
that is, if prices change, demand and supply will adjust to a position where producers will be
able to sell all that they want at that price, and consumers will be able to purchase all that they
want at that particular price. Similarly, if levels of demand and/or supply alter, the price will
adjust to reflect such
changes and move to a position where demand and supply are again equal. Proponents of the
market system believe that its ‘invisible hand’ will result in an allocation of resources that will
maximise the benefits to society, known as Pareto-efficiency, named after, and based on the
work of, the Italian sociologist of the nineteenth century
- To ensure that resource allocation and income distribution are considered, there has to be a
degree of ‘external involvement’usually governmental – in the operation of the market to
counter such extreme scenarios from developing
- What remains an issue is the extent of such government involvement.
- These two issues are vitally important in economics and together they combine to form, what
has been termed, the social welfare function, with its individual components of efficiency and
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