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The Law of Demand

Autor:   •  May 4, 2018  •  Term Paper  •  767 Words (4 Pages)  •  252 Views

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The law of demand tells us, other things equal, consumers will buy more of a product when its price declines. Similarly, they will demand less if there is an increase in price. However, by how much more or less they buy is determined by the product. As some demand for products may change by the same unit change in price. The responsiveness or sensitivity of consumers to a price change is measured by a products price elasticity of demand.

When a good is said to be inelastic it is describing the situation in which quantity demanded is insensitive to the recent change in price. This situation is one in which all producers or suppliers favour. This Is because of the direct relationship between price and total revenue, an increase in price increases total revenue. As such many producers and suppliers take in to account this economic theory and use it to their advantage to maximise profits. One field in particular who exploits this is the medical arena. Medication is one of the few products in which a consumer will not be hesitant to purchase due to changes in price. Also given the circumstance there may little to no substitutes available.

Cancer patients are mostly affected by this as they are the most vulnerable consumers, who would buy medication at any price in hopes of recovering or prolonging their life. According to most users of such medication cancer drugs offer small benefits at an exorbitant price. Provenge costs $93,000.00 for a course of treatments and extends life by a couple months. Yervoy costs $120,000.00 for three months, some patients live longer which is what drives the demand for this treatment and patients accept the cost. Cancer plays a huge role in raising costs, according to the American’s National Institutes of health spending on all cancer treatment will rise from $125 billion to a staggering $207 billion by the year 2020.

Producers are most definitely aware of these predictions, while also enjoying the fact that there will always be a need or constant demand for their products. These factors allow producers of medicine to raise prices to the amount they see desirable, especially when not monitored closely by the necessary authorities. A prime example of this is the Martin Shkreli scandal. Mr. Shkreli was the CEO of a pharmaceutical company who sold a drug responsible for treating people with a parasitic infection which can be fatal for people with HIV or cancer. The price of one pill was valued at $13.50, on the premise of maximising profits for its shareholders Shkreli raised the price overnight to an unexplainable figure of $750.00 per tablet. During an interview with the New York times he also mentioned the potential he saw in pharmaceuticals. As such he acquired several old rarely used drugs and raised their prices. For example, a drug with the purpose of treating kidney stones was raised from $1.50 per tablet to $30.00 per pill.

While some prices which have risen overnight have been caused by shortages many have been caused by business strategy, like the one executed by Mr. Shkreli. Many corporations acquire old neglected drugs and turn them in to high priced specialty drugs. These drugs are now sold to those who can afford it and have no complications with the price. Daraprim, which is one of the drugs acquired by Mr. Shkreli had a cost of $1.00 per pill. After the unconscionable raise in price sales still totalled $6.3 million dollars in 2011 compared to the $667,000 in 2010. In 2014 the prices rose again and the increase in revenue was $9.9 million dollars. This therefore shows that consumers will continue to purchase the drug as it is an inelastic good (pollack, 2015).

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