ABSTRACT
This chapter explores the basic principles upon which economic theory is based and how these principles can be applied to healthcare. Economic theory can be used to try to explain and predict how healthcare systems work. In applying mainstream economics to health and healthcare, health economists have, inevitably, become aware of some of the limitations of these theories compared with the realities of healthcare provision. There are two distinct branches of economics, and this distinction carries through into health economics. The first branch of economics tries to use theory to explain and predict the operation of the economic system. This is sometimes referred to as positive or explanatory economics. The second branch of economics assumes particular values and then tries to go about achieving those. This is sometimes referred to as normative or welfare economics. The philosophy and methodology of health economics is largely associated with that of mainstream economics.
