Question

Elasticity of demand for prescription drugs is estimated to be much lower than elasticity of demand for one particular brand of over-the-counter cough medicine. One reason for this isElasticity of demand for prescription drugs is estimated to be much lower than elasticity of demand for one particular brand of over-the-counter cough medicine. One reason for this is

Answer 1

Answer (D) There are few substitutes of prescription drugs, and many substitutes of one brand cough medicine.

Elasticity of demand is used to measure the responsiveness of change in the quantity demanded of a good when there are changes in its price.

The elasticity of demand of various goods, and services is affected by various factors, such as:

• Portion of income spent on that good
• Necessity, or luxury.
• Number of substitutes available
• Time period of change in preferences

In the given case, we have to determine that what is the reason behind prescription drugs having lower elasticity, while the demand for a particular brand over the counter cough medicine is higher.

In this case, we will take into account the factor dealing with the number of substitutes.

The substitutes refer to those goods which can be used in place of each other. The consumers can easily shift between the substitutes when there is change in their prices.

When we take into account a particular cough medicine, then it can be seen that there are many substitutes available for this particular category.

This is a general medicine, which has many substitutes. So, if the price of one brand increases, the consumers can easily shift to other brands.

Therefore, the elasticity of a particular brand of cough medicine is high.

On the other hand, the broad category of prescription drugs does not have many substitutes. This restricts the options for consumers.

Hence, even if the price of prescription drugs rise, the consumers have to buy them because of not much substitutes.