Question

1.   Analysis of Necessities: Why are anti-diabetes drugs likely to have inelastic demand? Define elasticity and provide graphical support to your explanation. Why elasticity is so important to forecast market trends?

2.   Explain the different market structures using graphs and verbal explanations. Provide an example of each market. Why monopolies arise and what governments can do in face of monopolies?

3.   Markets and wellbeing: Why we want markets that make consumer and producer surplus bigger? Explain the concept of surplus and the relationship between price and consumer surplus. Please, build your argument trough an example (it can be fictitious).

Each answer must contain a brief introduction to concepts and facts, a part of analysis and critical evaluation and final conclusions.

Answer 1

Answer to Part 1)

Elasticity of demand, refers to the degree of variation in demand for a commodity with respect to its price. If the elasticity is high, it means that with a change in price of the commodity, people would change their demand patterns accordingly. An increase in price would mean people demand lesser and vice versa.

When it comes to necessary goods, the prices of these do not have an impact on the demand for the same. Diabetes patients require these medications for their survival. Survival demand will not go down with price, because the benefit which people are getting from the same is very basic and is for life itself. People may spend all their income on this but not reduce demand and therefore, the demand is inelastic.

A curve representing the same is as follows: -

Here we see that the Price is described on the Y Axis, while the Quantity Demanded is on the X axis. Even with a rise in price of the good, the quantity demanded remains the same as it is a good which cannot be avoided by the person and is necessary for their lives. Across price levels P1, P2 and P3 thus, the quantity demanded does not change.

Please feel free to ask your doubts in the comments section.