Research Topics: Price Controls

PRICE DISCRIMINATION OF A PHARMACEUTICAL FIRM

PRICE DISCRIMINATION OF A PHARMACEUTICAL FIRM A global pharmaceutical firm typically resorts to price discrimination wherein prices across different countries vary based on the people’s purchasing power at forefront ( 2001).  As the demand in poorer countries like Africa is relatively more elastic than richer ones like United Kingdom, a pharmaceutical firm will adjust its prices to exploit the large but low purchasing power base of the population.  To gain most of the concentration of public purchase, it could lobby to the host government for rivalry protection, security and distribution.             Some of the advantages of such strategy is mass production capability, and to some extent, greater realization of societal responsibility that can lead for international philanthropy associations to fund the firm’s research and development.  This second benefit is far more useful for the firm in the long-run strategy as approximately 0 million dollars and 15 years are needed to launch a single drug to the market (, 2003).  However, drawbacks are inevitable like host competitor’s engagement to price war that could have disastrous effects to the firm as price discrimination cannot survive in a perfectly competitive market structure.  Another, there is also the possibility that the host population could divert selling of the discounted drugs to rich countries that can result to price distortion and lost of competitive position to other countries.             As a conclusion, the pharmaceutical firm should plan and benchmark alternatives in order to conceive future problems in price discrimination strategy.  It could also develop strong and aggressive ties with international movement like United Nations that can be very effective intermediary to communicate to host countries’ government.  Consequently, before it manages to plunge strategic planning and coordination prerequisites such as global competitiveness and huge financial base should be first establish to survive competition and absorb any long-term looses.         Bibliography Credit:ivythesis.typepad.com

PRICE DISCRIMINATION OF A PHARMACEUTICAL FIRM

PRICE DISCRIMINATION OF A PHARMACEUTICAL FIRM A global pharmaceutical firm typically resorts to price discrimination wherein prices acros...

Micro Economics

” Micro Economics”   INTRODUCTION      Economics. From the Greek oikos, meaning ‘house’, and nomos, meaning ‘rule’, thus economics also means “household management”.         Economics is a social science that studies the production, distribution, trade, consumption of goods, services, and scarcity of resources and its alternatives.      Scarcity if a situation where there is limited resources at hand, such as capital, labor, or raw materials.      Economics is broadly divided into two main branches these are: microeconomics, which deals with individual agents, such as households and businesses, and macroeconomics, which considers the economy as a whole, in which case it considers aggregate supply and demand for money, capital and commodities.      Microeconomics, which literally, very ‘small economics’ is a social science which involves the study of the economic distribution of production and income among individual consumers, firms, and industries in a smaller level than that of macroeconomics. It considers an individual, both as suppliers of labor and capital and as the ultimate consumers of the final product.      It also examines firms both as suppliers of products and as consumers of labor and capital.      One of the goals of microeconomics is to analyze economic systems such as market forces that establish relative prices amongst goods and services.         Here are some exercises that will help you understand more about microeconomics:    PART A:      QUESTION 1:  You are the manager of a company producing and selling jumpers.  At present, you charge a price of £50 per jumper, and you have monthly sales of 100 units.  You know that the price elasticity of demand of your customers is -1.5.  In order to increase sales and revenues, you are planning to decrease the price to £40.  Is this a good business decision?         ANSWER:  The main topic in this problem is ‘price elasticity of demand’.  So, in order to answer the question, let us first discuss what ‘price elasticity of demand’ is.      Price elasticity of demand (PED) is an elasticity that measures the responsiveness of the quantity demanded of a good to its price, with all other factors held constant.        Mathematically, it is represented as:   Where: P = price Q = quantity   Or as:      Q2 – Q1__                 (Q1+Q2) / 2_____      P2-P1__ (P1+P2) /2 Where: Q1 = Initial quantity Q2 = Final quantity P1 = Initial price P2 = Final price           Since quantity demanded is inversely proportional to price, from this assumption, in this case, lowering the price from £50 to £40 would result to higher quantity demand from 100 units a month up to approximately 180 units.  Therefore, lowering the price of the jumpers would be a good decision to increase sales and revenues.      QUESTION 2:  Paul is a smoker and he complains to Gordon Brown (the UK Chancellor) that the price of cigarettes is too high.  Gordon Brown replies that he actually thinks that the price of cigarettes is too low since the market does not acknowledge the social cost of smoking.  How can you explain Gordon Brown’s point?        ANSWER:  Chancellor  said something about the cigarette market not acknowledging the social cost of smoking.  First let us define what social cost is. In economics, social cost is the total of all the costs associated with a certain economic activity to the society. And in this case the cigarette production and consumption.      Social cost includes both costs endured by the economic agent and also all costs borne by society at large.  Including the costs reflected in the organization’s production function which is called private costs, and the costs external to the firm’s private costs called external costs.      If social costs are greater than private costs, then a negative externality is present.      Negative externalities or external costs can lead to an over-production of those goods that have a high social cost.  An example of this is our own case at hand.  When people smoke a lot, it deteriorates their own health. And also, it adds to air pollution which is one of the major problems of every government in the world.      As a solution, Pigovian tax is levied to at least level the negative social side-effects of a certain economic activity.       Pigovian tax is a tax levied on producers who pollute the environment to encourage them to reduce pollution, and to provide revenue which may be used to counteract the negative effects of the pollution.      Also, some certain types of Pigovian taxes are sometimes referred to as sin taxes, for example taxes on alcohol and cigarettes.      The problem with Pigovian tax is that of calculating what level of tax will counterbalance the negative externality of these firms.  And also, political factors such as lobbying of polluters to the government may also tend to reduce the level of the tax levied, which will tend to reduce the mitigating effect of the tax.        QUESTION 3:  The main source of ‘economies of scale’ is large ‘fixed costs’. Briefly explain.             ANSWER:  To answer this, let us first define what is ‘economies of scale’ and what is ‘fixed cost’.      Economies of scale refers to the decreased per unit cost as output increases.  To be more precise, the initial investment of capital is diffused over an increasing number of units of output.        As a result, the marginal cost of producing a good or service decreases as production increases.      Meanwhile, fixed costs are expenses whose total does not change in proportion to the activity of a business. Examples of these are rent and utility bills insurance, and payroll.      Economies of scale is more likely to happen in an industry who has a large capital and fixed cost, which such costs are distributed in across a very large number of units of production.       A factory is a good example of this.  When an investment in a machine is made (which requires electricity, or other form of fuel), a worker will be hired (which need to be paid) and begins to work on the machine to produce goods.  When another worker is hired, the production will be doubled without adding significant cost of operation to the factory. Therefore, the cost of production of an additional good is less than the cost of good before.     PART B      ‘Happy Chicken Ltd. ‘is a small poultry farm producing chicken meat for big supermarkets.  The poultry is a competitive industry populated by a large number of small producers.  At present, the industry is as its ‘long-run’ equilibrium and ‘Happy Chicken Ltd.’ is making normal profits.      A) Draw a graph showing the market demand for and supply of chicken meat and the long run equilibrium for ‘Happy Chicken Ltd.’     Remember, fear for a ‘bird flu pandemic has dramatically reduced the demand for chicken meat.   B) Use the graph you have drawn to: a) To show short run effects of this shock on the market equilibrium and on ‘Happy Chicken Ltd.’; b) Explain whether ‘Happy Chicken Ltd.’ Will have incentives to leave or to stay in the industry; and c) Assuming that the effect of this shock is permanent, describe how the economy will adjust in the long run.            This is a graph showing the market demand for and supply of chicken meat and long-run equilibrium for ‘Happy Chicken Ltd.’.  The ‘bird flue epidemic taken into account.                 LEGEND:   AC = average total cost AR = average revenue MC = marginal cost MD = market demand MR = marginal revenue MS = market supply P = price (P1, P2…) Q = quantity (Q1, Q2…)          When more people want something, the quantity demanded at all prices will tend to increase. This can be referred to as an increase in demand.      But according to our scenario, which is the ‘bird flu epidemic’.  People tend not to buy chicken meat.  And therefore there is oversupply or surplus on a lot of chicken products.  Including ‘Happy Chicken Ltd.’ Even if they push their prices down.       ‘Happy Chicken Ltd.’ is in a competitive industry and is therefore it has the freedom to enter or exit the industry.      In our scenario, ‘Happy Chicken Ltd.’ is still experiencing normal profits.  It still can cover all its variable costs plus part of the fixed costs.  Meaning it has no losses, and also it has no profits as well.      As long as ‘Happy Chicken Ltd.’ is having normal profits, the firm can still cover all its variable costs and the same fixed costs as well.  It is till best to wait and find out whether market conditions will improve to their own advantage. Since at this point ‘Happy Chicken Ltd.’ neither has an incentive to leave or to stay in the business.      However, if ‘Happy Chicken Ltd.’ suffers Sub Normal profits or losses, they still should not take the decision to withdraw from the market immediately in the short run.  But if assuming that the effects of the ‘bird flu epidemic’ are permanent, and If ‘Happy Chicken Ltd.’ continues to make losses even in the long run the firms will have ultimately to leave the industry.      And as for the economy, the prices will keep coming down until they reach the profit maximizing output level where firms will only produce normal profits.  Thus, establishing a long run equilibrium level.                           Credit:ivythesis.typepad.com

Micro Economics

” Micro Economics” INTRODUCTION Economics. From the Greek oikos, meaning ‘house’ , and nomos, meaning ‘rule’ , t...

Price Elastic Demand and Price Inelastic Demand

Price Elastic Demand and Price Inelastic Demand   Introduction In the highly globalised markets of today, firms actually coax their consumers to show their high demands for a certain product of that firm (O’Sullivan, A., Perez, S., & Sheffrin, S. 2006). When a customer does name his price, however, is very close to a demand curve. But what is Price Elasticity of Demand? This describes the relationship between the changes in the demands for the product and the changes in the price of the product.             “The most commonly used measure of the influence of price changes on consumers’ demand is the price elasticity of demand. The price elasticity is the ratio between the percentage change in quantity and the percentage change in price when there is a (small) change in price. Note that elasticity is not the same thing as slope; a demand curve’s slope is not a good measure as it depends on the units of measurement of price and quantity, making it difficult to compare across products or markets. Elasticity, on the other hand, deals with percent changes so that price sensitivities of goods and markets can be characterized using a common descriptor.” (Waldman and Jensen, n.d.).             The price is inversely related to the quantity demanded, ceteris paribus (Case, Karl E. & Fair, Ray C. 1999).  However, given any change in price our demand does not change constantly and at the same percentage change of the price.  Thus we may say that the price elasticity of demand measures how responsive the quantity demanded of a good is to a change in its price.  Usually, our basic needs are considered inelastic while luxury goods are considered elastic.  Basic goods have inelastic demand because we cannot easily shift from one good to another or give up them.  This is because these goods are necessities.  On the other hand, luxury products are considered products that show elastic demand because the change in price resulted more than proportionate change in quantity demanded.  Luxury goods have elastic demand because we can shift from one good to another if the price is no longer reasonable.  We can even give it up if the price is very high. For this paper, let’s consider the determinants of price elasticity/inelasticity of two types of products.  For inelastic, we have bread products and for elastic we have shoe products.   Discussion             For elastic goods let us now consider shoe products and identify its determinants. When the price of a certain shoe products increased by almost half, we may immediately consider other shoe products in which price is much is lower.  Thus with this, we may say that the price of the good in relation to our spending capabilities is a determinant. It can be argued that goods that account for a large fraction of disposable income have a propensity to be elastic. Apparently, we as consumers often consider other substitutes of shoes.   Thus we may say that the number of substitutes is a determinant. So instead of buying expensive shoes from Nike, we tend to go to their substitutes such as Adidas, Converse or Reebok or we may opt to choose buying sandals instead of close shoes as substitute. This means that the larger the number of close substitutes for the good then it is easier for us to shift to alternative goods if the price increases. Usually, the larger the number of close substitutes, the more elastic the price elasticity of demand. In accordance to our shoe products, we may also say that the degree of necessity is also determinant factor of its elasticity (Mas-Colell, A, Winston, MD & Green. JR 1995).  It means that if feel that we don’t really need to buy a new pair of shoes even the price of it is low, we tend to choose other products. Basically, the higher necessity items have little change in demand despite changes in price. Because they are “necessary” to survival, happiness, etc. people become willing to purchase them even when price changes occur. The following figure shows the perfect elastic demand. Figure 1 In accordance to our inelastic products i.e. bread products. The determinants remain to be the price of the good in relation to our spending capabilities, number of substitutes, and degree of necessity.             So for bread products, even though the price of it increases, we still opt to buy this because we need it to fuel our body.  Similarly, even tough there are number of substitute food products, we still choose to buy breads because of the nutrients it gives. Our consumers have no choice than to keep buying because substitutes are not freely available and easy to switch to (Thaler 1985). In accordance to degree of necessity, the necessity of this type of product is tremendously high thus regardless of the increases in prices, people opt to buy this product.  The figure below shows perfect inelastic demand.   Figure 2   As seen in the above discussion, we have seen how responsive our demand is in accordance to the movement or change in price. And this is what we call elasticity (McCracken 1986).  The price elasticity of demand can be computed by this averaging formula (Case, Karl & Fair 1999):             Where: epd =  price elasticity of demand = new quantity demanded = old quantity demanded  = new price  = old price               Using this formula and using the quantity data below, we may try to compute the price elasticity. There are some instances that negative values will occur but this is only represents the inverse relationship between the price and the quantity demanded.  And we just only need to get its absolute value.  If epd is greater than 1, it is elastic and if less than 1, it is inelastic.  The total revenue is the product of the price and quantity.  This is the money of the seller’s hand at the end of the day.  However, it is not yet his profit because he has not yet deducted the cost.   Table 1.  Computed Elasticity and Its Classifications Products Qs Total Revenue epd Nature Bread Products 10 200     12 216 1.72 elastic 12 224 1.31 elastic Shoe Products 16 224     18 216 0.76 inelastic 20 200 0.58 inelastic   References: Case, Karl E. & Fair, Ray C. (1999). Principles of Economics (5th ed.). Prentice-Hall. ISBN 0-13-961905-4.   Goldman, A., & Sigismond, W. (2003). Business Law: Principles and Practices. Boston: Hough-ton Mifflin Company.   Mas-Colell, A, Winston, MD & Green. JR (1995). Microeconomic Theory. Oxford University Press, New York, McCracken, G. ( 1986 ). “Culture and consumption: A theoretical account of the structure and movement of the cultural meaning of consumer goods”. Journal of Consumer Research, 13, 71-84. O’Sullivan, A., Perez, S., & Sheffrin, S. (2006). Economics: Principles, Applications, and Tools (5th Edition). Alexandria, VA: Prentice Hall. Thaler, R. ( 1985 ). “Mental accounting and consumer choice”. Marketing Science, 4, 199-214. Waldman and Jensen. (n. d.). Industrial Economics (EC3066): Topic One: Schools of Thought. Retrieved January 09, 2009 from http://staff.bath.ac.uk/ecsjgs/Teaching/Industrial%20Organisation/Handouts/01%20-%20Schools%20of%20Thought/Handout%201a.pdf Credit:ivythesis.typepad.com

Price Elastic Demand and Price Inelastic Demand

Price Elastic Demand and Price Inelastic Demand Introduction In the highly globalised markets of today , firms actually coax their co...

Price elastic demand and Price inelastic demand in beverages

Price elastic demand And price inelastic demand   Introduction It can be said that different products have different prices and the price of the products depends on the demand or supply. Accordingly, if the demand of the product significantly changes with slightly changes in prices, the product can be considered in the category of elastic with respect to prices. If there is no significant volume changes happened, even if there is a significant price changes, the category can be considered as inelastic. Primarily, the main goal of this paper is to analyse the determinants on how and why a products can be considered elastic and inelastic, by considering the analysis of two products.   Analysis             Often, businesses know that they encounter demand curves; however, there are only few business who knew what these curves look like. Moreover, the business should also have pertinent idea of what part of the demand curves look like to make strategic and efficient decisions. As mentioned, the degree in which a demand curve reacts to price change is the elasticity of the curve and it various among various products because some products may be more marketable among the target market than the other. It has been noted that products which are necessities are more insensitive to changes in price because consumers would definitely continue to buy them even if their price increases. On one hand, a price increase of a product or service which is considered less of a necessity are more sensitive to price change since consumer may deter on buying them if the price is high.             A product or service is regarded to be highly elastic if minor change in price results to a sharp change in the quantity demanded. Typical, such types of products are easily seen in the market and the consumer may not necessarily require them in their daily living. On one hand, inelastic products are one which in price changes witness modes change in the demanded quantity. Such things are those which are needed by the consumer in their daily life.             For this report, the consideration of beverage and beverages will be given emphasis. As can be seen in the figure below, both the equilibrium quantity and equilibrium price will increase when the demand increases.  In the figure, the alcohol products are seen to experience larger change in price but a smaller change in terms of quantity because of the inelastic demand while the beverage market will experience a larger change in terms of quantity and smaller change in price because of the elasticity of the demand. In this figure, it can be said that the consumer spending (price x quantity) increases in both situations, since both of the quantity and price increase. Figure 1 Comparison of Price Elastic for Beverage And Inelastic Price of Alcohol drinks There are three major aspects which can be considered as determinants that influence the elasticity of the price in terms of demand. One of these is the availability of the substitutes. This is perhaps the most essential aspects that influence the elasticity of the product. Generally, the more substitutes the more elastic the demand will become. For instance, if the price of the beverage products went up by went up by .25, consumers can replace their beverage products to different products like water and fresh juices. This indicates that the beverage products are an elastic product since a raise in price will cause a large reduction in the demand as the consumer will start buying substitute product that offer lesser and affordable price. In line with the alcoholic drinks like beer, consumers cannot easily change their products especially those alcohol users.   If the price of the alcohol products were to increase, we can see minor change in the consumption of alcohol because there are few substitutes for alcohol drinks. And there are people who are not willing to give up their alcohol drinking, specifically the brand that they always buy no matter what the price. In this regard, it can be concluded that alcohol drinks is an inelastic product due to the lack of lack of substitutes.  In this regard, while the product within the industry served to be elastic because of the substitute’s availability, the industry itself tends to become inelastic. it can be said that unique products like diamonds are inelastic or gasoline and petroleum because they have few or no substitutes. Aside from this, another determinant is the amount income available to spend on the good of the consumers. Herein, the aspect that affects demand elasticity or inelasticity referred to the totality of the individuals who can spend on specific products or services Hence, if the price of beverage products such as soft drinks goes up from .50 to and the income of the people remains same, the income which is available to spend on soft drink or beverage products, which is , is now enough for consuming and buying two rather than four cans or bottles of the soft drinks. It goes to say that the consumer is being forced to decrease their consumption and demand for these products. hence, if there is an increase price and there is no change in the income of the people and consumers to spend on these products, we can see some elastic reaction in demand. It can be said that the demand will be price sensitive if there is no change in the income of the people.       The last determinant is the context of time. Accordingly, if the price of the alcoholic drinks goes up per pack, an alcoholic user with very few available substitutes will still consider buying the drinks for consuming. This indicates that alcoholic drinks tend to be inelastic since the changes in price do not have significantly relative effect on the quantity demanded. Nonetheless, if the alcoholic users find that he or she cannot afford to spend more for the alcoholic drinks the user tends to drink less often and the price elasticity of alcoholic drinks for specific consumer becomes elastic eventually. It can be concluded that the needs of the consumers must always be satisfied and consumers have the right to avail whatever products they want. However, the people will only buy specific goods in specific quantities at specific prices; hence if the price changes, the quantity demanded tends to change as well and that’s how price elasticity of demand and inelasticity of demand are seen. Reference Lau, E. 2008. What is meant by price elasticity of demand? How can we measure the elasticity of demand? Why is an understanding of elasticity of demand important to both business firms and the government? Online available at http://www.nointrigue.com/docs/notes/economics/eco_y11priceelas.pdf retrieve January 8, 2009.               Credit:ivythesis.typepad.com

Price elastic demand and Price inelastic demand in beverages

Price elastic demand And price inelastic demand Introduction It can be said that different products have different prices and ...

Determinants of price elasticity/inelasticity of Will Bury’s digital books.

Price Elasticity   Introduction In the highly globalised markets of today, firms actually coax their consumers to show their high demands for a certain product of that firm (O’Sullivan, A., Perez, S., & Sheffrin, S. 2006). When a customer does name his price, however, is very close to a demand curve. But what is Price Elasticity of Demand? This describes the relationship between the changes in the demands for the product and the changes in the price of the product.             The price is inversely related to the quantity demanded, ceteris paribus (Case, Karl E. & Fair, Ray C. 1999).  However, given any change in price our demand does not change constantly and at the same percentage change of the price.  Thus we may say that the price elasticity of demand measures how responsive the quantity demanded of a good is to a change in its price.  Usually, our basic needs are considered inelastic while luxury goods are considered elastic.  Basic goods have inelastic demand because we cannot easily shift from one good to another or give up them.  This is because these goods are necessities.  On the other hand, luxury products are considered products that show elastic demand because the change in price resulted more than proportionate change in quantity demanded.  Luxury goods have elastic demand because we can shift from one good to another if the price is no longer reasonable.  We can even give it up if the price is very high. For this paper, let’s consider the determinants of price elasticity/inelasticity of Will Bury’s digital books.     Discussion             In the given case of Will Bury, it shows that there are elastic goods that can compete to his invention or his planned business, the audio-type digital books. And this factor could affect his product distribution. And since there are now numerous substitutes, Will Bury should carefully access it.  Let say, when the price of his products increased by almost half than its usual prices, the consumers/customers may immediately consider other digital book products in which price is much is lower e.g. non-audio digital book files.  Thus with this, we may say that the price of the good in relation to our spending capabilities is a determinant. It can be argued that goods that account for a large fraction of disposable income have a propensity to be elastic. Apparently, we as consumers often consider other substitutes of digital books.   Thus we may say that the number of substitutes is a determinant. So instead of buying the possible expensive audio-typed digital books from Will Bury, we tend to go to their substitutes such as non-audio digital book files or if we really prefer audio files we may just prefer to buy music CDs or DVDs. This means that the larger the number of close substitutes for the good then it is easier for us to shift to alternative goods if the price increases. Usually, the larger the number of close substitutes, the more elastic the price elasticity of demand. Moreover, Will Bury may also consider that the degree of necessity is also determinant factor of its elasticity (Mas-Colell, A, Winston, MD & Green. JR 1995).  It means that if we, the consumers feel that we don’t really need to buy digital type of books even the price of it is low, we tend to choose other products. Basically, the higher necessity items have little change in demand despite changes in price. Because they are “necessary” to survival, happiness, etc. people become willing to purchase them even when price changes occur. The following figure shows the perfect elastic demand. Figure 1 On the other hand, the next figure shows perfect inelastic demand.   Figure 2 As seen in the above discussion, Will Bury need to consider the demand of consumer to digital books.  As seen in the presentation, it shows how responsive the demand is in accordance to the movement or change in price. And this is what we call elasticity (McCracken 1986).  The price elasticity of demand can be computed by this averaging formula (Case, Karl & Fair 1999) which is needed by Will Bury:             Where: epd =  price elasticity of demand = new quantity demanded = old quantity demanded  = new price  = old price               Using this formula, Will Bury may compute the price elasticity of his product. There are some instances that negative values will occur but this is only represents the inverse relationship between the price and the quantity demanded.  And we just only need to get its absolute value.  If epd is greater than 1, it is elastic and if less than 1, it is inelastic.  The total revenue is the product of the price and quantity.  This is the money of the seller’s hand at the end of the day.  However, it is not yet his profit because he has not yet deducted the cost.  But if Will Bury found out that his products is inelastic, then he will possibly have a successful business because inelastic product simply means that his consumer cannot easily shift from his good to another.  For Will Bury to be successful, he needs to carefully access the determinants of price elasticity of demand.   References: Case, Karl E. & Fair, Ray C. (1999). Principles of Economics (5th ed.). Prentice-Hall. ISBN 0-13-961905-4.   Mas-Colell, A, Winston, MD & Green. JR (1995). Microeconomic Theory. Oxford University Press, New York, McCracken, G. ( 1986 ). “Culture and consumption: A theoretical account of the structure and movement of the cultural meaning of consumer goods”. Journal of Consumer Research, 13, 71-84. O’Sullivan, A., Perez, S., & Sheffrin, S. (2006). Economics: Principles, Applications, and Tools (5th Edition). Alexandria, VA: Prentice Hall. Credit:ivythesis.typepad.com

Determinants of price elasticity/inelasticity of Will Bury’s digital books.

Price Elasticity Introduction In the highly globalised markets of today , firms actually coax their consumers to show their high dema...

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