Question

Where will profits be higher: When demand for a patented drug is highly inelastic or when...

Where will profits be higher: When demand for a patented drug is highly inelastic or when demand for a patented drug is highly elastic? Draw a graphical solution for BOTH to prove your answer (note: you need to have costs, prices etc…included in your answer—since you cannot explain anything in words)

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Answer #1

When the demand for a patented drug is highly inelastic, then the profits will be higher because in that case people will not shift to other products in case of competitives or substitutes available for the same. However, in the case of elastic demand, there are chances of shifting their demand in case of change in prices. It can be shown through the following diagram,

In case of inelastic demand, percentage change in quantity demanded is less than percentage change in price, hence even if the price rises due to increase in cost, there will not be much change in quantity demanded, hence, profits will be higher in this case.

However, for elastic demand, percentage change in quantity demanded is more than percentage change in price, hence with a rise in price to a rise in cost, change in quantity will be much higher and hence, profits will be lower.

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