Topic

Scarcity, choice and opportunity cost

Every health care decision starts from scarce resources, so choosing one use means giving up another. These concepts explain choice, marginal thinking and opportunity cost, the ideas that cost-effectiveness analysis puts into practice.

Concepts in this topic

• Choice TheoryChoice theory is the economic theory of how people choose among options given preferences and limited resources, underpinning demand and health valuation.
• Economic GoodIn health economics, any scarce good or service that commands a price and is subject to allocation choices, classified by rivalry, excludability and how consumers come to know its quality.
• Economic IncentiveA financial or non-financial inducement designed to encourage a particular decision or behaviour.
• Economic PrincipleIn health economics, a foundational proposition about how scarce resources are allocated, such as scarcity, opportunity cost and efficiency, underpinning the economic evaluation of health interventions.
• Good CharacteristicIn health economics, a property used to classify health goods and services by their rivalry in consumption and their excludability, explaining why provisions such as public health protection behave as public goods that private markets undersupply while most treatments behave as private goods.
• Marginal AnalysisMarginal analysis compares the extra cost and extra benefit of a small change in a health service, to judge whether expanding or cutting it is worthwhile.
• Marginal BenefitThe additional benefit gained from one more unit of a good, service, or activity.
• Marginal CostMarginal cost is the change in total economic cost caused by producing one additional unit of output at a specified level of activity and over a specified time horizon.
• Opportunity Cost AnalysisA form of analysis explicitly estimating the health or value forgone elsewhere in a system when resources are allocated to a specific intervention.
• Production Possibility FrontierA graph showing the maximum combinations of two goods or outcomes producible given a fixed set of resources and existing technology.
• Rational ChoiceA model of decision-making in which individuals are assumed to select the option that maximises their expected utility given preferences and information.
• Resource ConstraintA limit on the total resources, such as budget, staff, or facilities, available to an organisation, within which competing demands must be prioritised.
• Trade-offA situation in which achieving more of one objective requires accepting less of another, such as extra health benefit only at extra cost.
• Trade-Off AnalysisA systematic examination of how competing objectives, such as cost and health benefit, are balanced against one another in a given decision.
• Utility MaximisationThe behavioural assumption that individuals make choices intended to achieve the highest possible satisfaction given their preferences and constraints.