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.
Table of Contents
1. Introduction
2. Mylan Laboratories
3. Conclusion
Objectives and Topics
This paper examines the application of price elasticity of demand (PED) within the pharmaceutical industry, specifically focusing on the pricing strategies of Mylan Laboratories regarding their patented medications. The analysis explores how the inelastic nature of essential drugs allows companies to maximize revenue and the potential impact of market competition and patent regulations.
- Fundamentals of Price Elasticity of Demand (PED)
- Determinants of demand elasticity in the pharmaceutical sector
- Impact of patent protection on pricing power and monopolistic behavior
- Role of consumer necessity, substitutes, and insurance in drug demand
- Mathematical approach to calculating demand elasticity
Excerpt from the Book
Mylan Laboratories
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.
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.
Summary of Chapters
Introduction: Provides the theoretical definition of price elasticity of demand as established by Alfred Marshall and outlines its relevance for revenue maximization in business.
Mylan Laboratories: Analyzes the specific case of Mylan Laboratories’ price hikes for lorazepam, discussing factors like brand loyalty, drug necessity, and patent protection that influence market demand.
Conclusion: Synthesizes the findings by explaining that pharmaceutical companies benefit from inelastic demand due to patents and necessity, suggesting that market competition would significantly alter this dynamic.
Keywords
Price Elasticity of Demand, Mylan Laboratories, Pharmaceutical Industry, Lorazepam, Patent Protection, Inelastic Demand, Revenue Maximization, Market Competition, Generic Drugs, Consumer Necessity, Price Hikes, Healthcare Costs, Economic Determinants
Frequently Asked Questions
What is the fundamental focus of this document?
The document focuses on the economic concept of price elasticity of demand and its practical application within the pharmaceutical industry, using Mylan Laboratories as a case study.
What are the central thematic areas covered?
The key themes include the impact of price changes on consumer demand, the role of patents in creating monopolistic pricing power, and the influence of drug necessity on market behavior.
What is the primary objective of this study?
The objective is to evaluate why pharmaceutical products often exhibit inelastic demand and how this allows companies like Mylan Laboratories to implement substantial price increases.
Which scientific methodology is utilized?
The work employs an analytical economic approach, using the standard formula for price elasticity of demand to assess market responsiveness to price changes.
What topics are discussed in the main body?
The main body examines determinants such as the availability of substitutes, switching costs, insurance coverage, brand loyalty, and the influence of addiction or necessity on consumer demand.
Which keywords best characterize this work?
Key terms include Price Elasticity of Demand, Pharmaceutical Industry, Patents, Inelasticity, and Revenue Maximization.
How does patent protection affect Mylan Laboratories' pricing strategy?
Patents provide a form of protection that prevents competitors from entering the market, allowing Mylan Laboratories to maintain high prices for essential drugs because consumers lack viable alternatives.
What role do generic drugs play in this economic analysis?
Generic drugs represent the primary substitutes that, if introduced to the market, would likely shift the demand for Mylan’s products from inelastic to elastic by providing cheaper alternatives.
- Arbeit zitieren
- Kathy Morgan (Autor:in), 2011, Price Elasticity of Demand for Mylan Laboratories, Pittsburg, München, GRIN Verlag, https://www.grin.com/document/267032
