The Cost of Inelastic Goods
Many goods that are inelastic in terms of demand are ones that are essential or, in other words, necessary to one's self. There are several examples: basic foods, gasoline, or even medicine. I was interested in how producers can manipulate the prices of these goods and how the total revenue can change over time because those goods are inelastic.
The first example I thought of was insulin. Considered inelastic because, without it, those who are diabetic might physically suffer, I looked at the price trends in the past couple of years. Just as I predicted, the price has been rising dramatically in the past decade or so as producers are taking advantage of the consumers' essential need for this good. There are about 7.4 million Americans that use insulin and many struggle to pay the costs of this increasingly expensive drug. So, while rising prices benefit insulin manufacturers, those same prices come at a serious cost for patients as the demand for insulin is inelastic.
Other examples of goods that have inelasticity of demand are those that have few substitutes or little competition. So, Dr. Pepper, for example, is a very elastic good since there is a large market for soda and many other kinds that one person can substitute for if the prices of Dr. Pepper rise too high. However, gasoline is not as elastic since there are few alternatives if you don't have an electric or hybrid car. While there is competition among different gasoline companies and each brand might be more elastic, overall the demand for gas is pretty inelastic because people require it to get to work, get to home, and to travel the most efficiently.
Overall, the inelastic demand for medicine is one topic that should be considered more seriously because producers can take advantage of patients and consumers' unchanging and essential need for life-saving medicine. And, as certain goods are more inelastic than others, price changes of those goods help to increase the strength of the market of one good over another.
Sources:
https://www.cengage.com/economics/tomlinson/transcripts/8369.pdf
https://www.statnews.com/2018/05/17/insulin-paying-the-price/
https://www.economicshelp.org/blog/531/economics/inelastic-demand-and-taxes/
Image:
https://www.washingtonpost.com/news/wonk/wp/2016/10/31/why-insulin-prices-have-kept-rising-for-95-years/?noredirect=on
The first example I thought of was insulin. Considered inelastic because, without it, those who are diabetic might physically suffer, I looked at the price trends in the past couple of years. Just as I predicted, the price has been rising dramatically in the past decade or so as producers are taking advantage of the consumers' essential need for this good. There are about 7.4 million Americans that use insulin and many struggle to pay the costs of this increasingly expensive drug. So, while rising prices benefit insulin manufacturers, those same prices come at a serious cost for patients as the demand for insulin is inelastic.Other examples of goods that have inelasticity of demand are those that have few substitutes or little competition. So, Dr. Pepper, for example, is a very elastic good since there is a large market for soda and many other kinds that one person can substitute for if the prices of Dr. Pepper rise too high. However, gasoline is not as elastic since there are few alternatives if you don't have an electric or hybrid car. While there is competition among different gasoline companies and each brand might be more elastic, overall the demand for gas is pretty inelastic because people require it to get to work, get to home, and to travel the most efficiently.
Overall, the inelastic demand for medicine is one topic that should be considered more seriously because producers can take advantage of patients and consumers' unchanging and essential need for life-saving medicine. And, as certain goods are more inelastic than others, price changes of those goods help to increase the strength of the market of one good over another.
Sources:
https://www.cengage.com/economics/tomlinson/transcripts/8369.pdf
https://www.statnews.com/2018/05/17/insulin-paying-the-price/
https://www.economicshelp.org/blog/531/economics/inelastic-demand-and-taxes/
Image:
https://www.washingtonpost.com/news/wonk/wp/2016/10/31/why-insulin-prices-have-kept-rising-for-95-years/?noredirect=on
I believe that in a market like medicine where people depend on it in their daily lives, there should be some kind of restriction in terms of how much the price can fluctuate in order to ensure that people are able to afford their necessary medicines. However, with a product like gasoline, I think it can be beneficial in some ways to allow the price to increase because it can encourage people to use alternate modes of transportation like busses and trains to work, which would be saving them money and the environment.
ReplyDeleteIt is extremely disappointing to see that pharmaceutical companies are abusing the system by overpricing medication, like insulin, in order to make a profit, knowing that the demand for insulin will remain inelastic. It is so bad that some people have to travel south of the border to obtain proper medication. The U.S. government estimates that almost a 1 million people in California travel to Mexico each year just for health care (prescription drugs purchases included). It is beyond unreasonable that someone in America has to travel to another country for these basic human necessities. Right now, there are many states, such as Colorado, who are considering obtaining insulin from other countries to sell at a cheaper price. However, this idea comes back with its setbacks as imports don't carry safeguards like medication in the US offers for its US citizens. I believe that policymakers should be stepping into the issue and set a price ceiling for medicines, such as insulin, who have marked up their prices drastically beyond their production costs.
ReplyDeleteSource:
https://abcnews.go.com/Health/mom-traveled-mexico-insulin/story?id=61023174
https://www.npr.org/sections/health-shots/2018/11/28/671659349/we-re-fighting-for-our-lives-patients-protest-sky-high-insulin-prices
https://www.usnews.com/news/best-states/articles/2019-02-26/colorado-considers-getting-prescription-meds-from-canada
One interesting perspective I found about drug prices and the markups they often face was that many times, companies do this to increase revenues which they then use to either cover the original development cost of the drug or to develop new drugs. One such example comes from Martin Shkreli, ex-CEO of Turing Pharmaceuticals, who came under fire in the media for price hiking a drug from $13.50 to $750. However, the revenue model of the company revolved around getting insurance companies to pay the full price of the drug while giving away prescriptions of the drug to individuals who needed it and directly contacted Turing. The cost of the drug was increased to accommodate for the price of increasing research and development for new drugs. Although Shkreli became a controversial figure in the public eye, his decision to hike up drug prices mirrored many other pharmaceutical companies who do the same to cover the costs of drug research.
ReplyDeleteSource:
https://qz.com/851416/why-martin-shkreli-and-turings-daraprim-still-costs-750-in-the-us-when-australian-schoolkids-can-make-it-for-2/
https://www.theguardian.com/business/2016/oct/28/martin-shkreli-daraprim-hiv-drug-price-hike-interview
Thank you for posting this interesting blog. Actually, I was volunteering for a medical skills course that used the intravenous (IV) saline bag--one of the most common components of emergency medicine--the past weekend, and I overheard that the manufacture's price of an IV bag is only 1 dollar but sometimes hospitals overcharged it to 700 dollars. As I investigated more on this overprice issue, I think the reason is due to the oligopoly model of these medical supply--the IV bag--since these supplies are majorly bought from the top three organizations which signed contracts for more than half of the medical supplies in the United States. I believe that policy makers could change this market model for medical supplies to pure competition, in this way, the price of this demanded common medical supply would be lower due to the competition.
ReplyDeleteSource:
https://www.nytimes.com/2013/08/27/health/exploring-salines-secret-costs.html