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Price Elasticity of Demand - Essay Example

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This research will begin with the statement that the price elasticity of demand (PED) is used to measure how price changes affect the number of goods or services sold. It is therefore a responsive mechanism and is applied to all industries…
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Price Elasticity of Demand
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Download file to see previous pages It is evidently clear from the discussion that in a business aiming at maximizing revenue, the PED has to be exactly 1. A PED higher than 1 reflects a very elastic product where the quantities demanded are largely affected by the price change. The figures in the paper reflect the way the various curves will look like in different scenarios. Mylan Laboratories Mylan Laboratories is a pharmaceutical company in Pittsburgh. The company announced an increase in the prices of their drugs. One client claimed that the company increased the price of a drug referred to as lorazepam from an initial $11 to $85. The man who had been a worker at an oil rig was involved in an accident and is now dependant on those drugs to relieve the pain. He is on a government scheme that entitles him to $1,000 every month. He usually uses around 100 pills every month and he has taken out a loan in order to finance his drug requirements. This move is seen as a means of fleecing the citizens as the pharmaceutical companies await the government to remove patents to some drugs that have long been on the patent list. There are others who are claiming that the move is in anticipation of the new health care bill. The pharmaceutical industry has been under a lot of strain caused by the AIDS pandemic and companies have been criticized for failing to reduce their prices to the benefit of millions of people living with the disease in Africa and Asia. The major point of criticism was the patents that protect these much-needed drugs hence driving costs of the medicine up. Pharmaceutical products are very inelastic as they are considered as necessities. Therefore, the price elasticity of demand for them would not exceed 1. In this case, Mylan Laboratories has increased their prices by close to 600% and this will have an effect on the demand as many people cannot afford the extra expense that is accompanied by the price increment. There are a number of factors that will inform the elasticity of the demand. First, the availability of substitutes is a major determinant. With the presence of generic drugs that are supplied by competitors, the increase in prices of the patented Mylan Laboratories’ drugs may decrease the demand. The substitutes’ closeness to the Mylan Laboratories’ drugs, their uniqueness and their prices may be the greatest deterrent to Mylan Laboratories increasing revenues from the sale of the drugs even at the increased rates. The second determinant is the cost of switching to the other drugs. Many consumers of drugs are usually covered by insurance companies. If the company is responsible for the purchase of drugs, this might make it impossible or expensive for the consumer to change to other drugs. The price of the patented drugs is too high for the citizens and there has been no significant increase in income. Another problem that may hinder the change in demand for the drugs may be brand loyalty. Some consumers are attached to certain brands such that they become insensitive to price changes. This might be so for the people with greater disposable incomes who still may find the increased prices still within their means. Another determinant of the PED is the time the consumers will take immediately after the increase. Some consumers may wait for some time in order for them to resume buying the product. ...Download file to see next pagesRead More
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