ECO 605 Discussion 1.2: Price Elasticity of Demand
ECO 605 Discussion 1.2: Price Elasticity of Demand
Discussion Guidelines
Initial Post
- Differentiate between demand and quantity demand.
- List the factors from your text that will change demand for a product.
- Describe how a specific medical treatment, drug, or device would be affected by each factor.
Price elasticity of demand (PED) is a type of measurement used to determine the change in utilization of a product or service in relation to the change in its price. PED can be calculated by dividing the percentage change in quantity demanded by the percent change in price (Hicks, 2021).
If the PED is less than 1, then the price is inelastic, meaning that when the price of the product increases, revenue will increase. Inelastic demand gives the producer more control of the market and is often seen with monopolistic companies that have little to no competition (Hicks, 2021).If the PED is greater than 1, the price is elastic, meaning that when the price of the product increases, revenue decreases. This means that the quantity demanded is fairly responsive if there is a change in price. If there is an increase in the price of bread, this would be fairly inelastic because bread is a staple in the majority of American diets. Elastic demand is common in markets where there are substitutes and rival products such as soft drinks like Coca-Cola and Pepsi (Hicks, 2021).
A drug that is fairly inelastic is insulin. However high the price of insulin becomes, diabetics will still need to purchase insulin because it is required for them to live, there is not a substitute. A medical treatment that can be elastic is plastic surgery. If the price of plastic surgery increases, there may be less consumers who pay for it. The surgery is typically a want rather than a need.
Reference
Hicks, L. L. (2021). Economics of Health and Medical Care. Jones & Bartlett Learning.
According to “Economics of Health and Medical Care,” price elasticity of demand is the quantity of a service demanded in response to the out-of-pocket price of a service or product (Hicks, 2021).
A product’s price can either be elastic or inelastic. If the price is elastic, the price elasticity of demand must be a value greater than 1.
That means that the quantity demanded is relatively responsive to the changes in price. For example, a house mortgage which is 50% of your monthly income is elastic because it is a large portion of your income. On the other hand, if the price is inelastic, demand must be a value less than 1. That means that the quantity demanded is relatively unresponsive to changes in price. For example, if there is an increase in gas prices, it would be inelastic because gas is essential and there are very few substitutes for it.
An example of a drug that would be inelastic is insulin. If an individual is a diabetic, they need insulin and there aren’t any substitutes. So no matter if the price increases, people will continue to buy insulin because they need to control their blood sugar. An example of an elastic drug would be Jublia, an antifungal medication used on nails. This drug’s price would be elastic because it is not a necessity and is usually used for cosmetic purposes.
Reference
Hicks, L. L. (2021). Economics of Health and Medical Care. Jones & Bartlett Learning.
Discussion 1.2
Price elasticity of demand is the response to the change in quantity consumed in relation to the change in price (Hicks 2021). This typically means there should be an increase in quantity consumed when the price drops, but by how much is the real question. Elasticity refers to the change in consumption of a good when there is a change in price, like when a car lot has huge sale and expects to shed inventory. Inelasticity refers to goods that are constant and don’t typically see a change in demand despite a change in price, like medications. Price elasticity has a profound impact on the consumer as it relates to drug prices and can be the difference between paying rent and paying for mediations (Mendoza, 2020).
An example of an elastic medical good is the generic version of a medication. Consumers are more likely to opt for this option when picking up a medication because it is a lower out-of-pocket cost to them. All things being the same, the consumer will often elect for the cheaper generic option over the more expensive name brand. Many of us call all ibuprofen, Advil, and the same is true with Tylenol and acetaminophen. What do we all have in our cabinets, the generics because they’re cheaper and we typically buy a larger bottle due to that savings over the brand name.
The price fluctuation of insulin is an example of inelastic demand. Patients need to purchase insulin so the increase in price, although inconvenient and often excessive, does not make a huge impact on demand. The insulin still is purchased. If there’s a decrease in price consumers are still unlikely to stock up as they only need so much and the insulin is only good for so long.
References
Hicks, L. (2021). Economics of health and medical care. Jones & Bartlett Publishers
Mendoza, R. L. (2020). Effects of innovation and insurance coverage on price elasticity of demand for prescription drugs: some empirical lessons in pharmacoeconomics. Journal of Medical Economics, 23(9), 915-922.