The price elasticity of demand (PED) is used to measure how price changes affect the quantity of goods or services sold. It is therefore a responsive mechanism and is applied to all industries. The most common description as crafted by Alfred Marshall is the percentage change of the quantity of a product demanded in response to a one percent change in the price of the product with all other factors remaining constant (Marshall 1920). When the change in demand is relatively unaffected (where the PED is less than 1), the goods sold are considered to be inelastic. 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 below reflect the way the various curves will look like in different scenarios.
Mylan Laboratories is a pharmaceutical company in Pittsburgh. The company announced an increase in 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 (Techdirt 2011, p. 2). 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 to 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.
- Quote paper
- Kathy Morgan (Author), 2011, Price Elasticity of Demand for Mylan Laboratories, Pittsburg, Munich, GRIN Verlag, https://www.grin.com/document/267032