Question

The second set of lecture notes on microeconomics includes mention of a paper titled, “Specialty Drug Prices and Utilization After Loss of U.S. Patent Exclusivity, 2001-2007” by Rena Conti and Ernst Berndt. According to the lecture notes, “Sales volume appears to increase substantially following generic entry, consistent with the usual assumptions regarding the negative relationship between prices and quantity demanded. As a result, total revenue from sales of both categories of drugs increased after patent expiration. For physician-administered drugs, the average increase in total revenue was 57 percent, while for oral drug the increase was 46 percent.” A. Based on this information, is demand for these drugs elastic or inelastic. Explain how you know. B. Given that many of these drugs are extremely important in enabling people to live relatively normal, productive lives or, in some cases, to simply live, is your answer to the question in part A about elasticity surprising? Explain why or why not.

Answer 1

(A) A generic entry in drug market will decrease the price of drugs. As a result, total revenue has increased as per information. This signifies that quantity demanded increased more than the decrease in price, and therefore demand for drugs is elastic.

(B) It is surprising that drugs are elastic goods. Medicines are necessity good for the consumers. Therefore, quantity demanded of drugs is expected to have low responsiveness to change in price. When price of medicines falls, its quantity demanded is not expected to increase proportionately or more than proportionately, because drug demand is need-based and not price-driven.