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Principles in Health Economics and Policy$
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Jan Abel Olsen

Print publication date: 2009

Print ISBN-13: 9780199237814

Published to Oxford Scholarship Online: May 2010

DOI: 10.1093/acprof:oso/9780199237814.001.0001

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Economics and efficiency

Economics and efficiency

(p.17) Chapter 2 Economics and efficiency
Principles in Health Economics and Policy

Jan Abel Olsen

Oxford University Press

This chapter introduces the ‘dismal science’ of economics to non-economists, and draws trained economists' attention to those parts of their discipline that are most relevant in the context of this book. It argues that the equilibrium point at which demand equals supply offers an attractive theoretical solution to ‘the grand economic problem’ of how much to produce in order to maximize welfare. The interaction between producers and consumers, each of them acting out of their own self-interest, brings about an optimal outcome where social welfare is maximized. The idea that an ‘invisible hand’ can bring about allocative efficiency has been immensely attractive to economists since the founding father of modern economics, Adam Smith (1723-1790), introduced this parable. However, the ‘invisible hand’ is troublesome in the real world, where a range of restrictive assumptions will have to be satisfied for the market to be the ideal system for achieving efficiency. Exercises and suggested readings are included at the end of the chapter.

Keywords:   health care, economics, supply and demand, social welfare

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