Question

a. Using the concept of price elasticity of demand, explain the conditions under which it would be rational for pharmaceutical companies to reduce the supply of drugs. Explain carefully.

b. Under the conditions you have identified, what do you think the appropriate response of the government should be? Explain your answer.

Answer 1

a} The price elasticity of demand for drugs which are necessity is price inelastic because the consumers will find it difficult to live without them. A significant price increase would be having no impact on their demand. The demand for luxury drugs is largely elastic, which means that their price varies with respect to the price of those drugs. Essential medicines are therefore a necessity. Here, we see that for the pharmaceutical companies, it is rational to reduce the supply of luxury drugs which are having a largely elastic demand. This can be done when the price of these luxury drugs increases significantly and whereby its demand falls. This time these pharmaceutical companies can reduce the supply of these medicines.

b} Under the conditions when the pharmaceuticals decide to reduce the supply of certain drugs which come under luxury drug category, the government can make it sure that the reduced supply does not mean the hoarding of these drugs. If the reudced suuply also means a reduced production, the government can encourage these pharmaceutical copanies to enhance their production of essential medicines.