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Lecture Issues in economics today - Chapter 23

Learning objectives of this chapter include: Individual and market demand, changes in demand, individual and market supply, changes in supply, graphing supply and demand curves, finding equilibrium price and quantity. | Chapter 23 The Economics of Prescription Drugs Chapter Outline PROFITEERS OR BENEVOLENT SCIENTISTS MONOPOLY POWER AS IT APPLIES TO DRUGS IMPORTANT QUESTIONS Profiteers or Benevolent Scientists? Spending on drugs accounts for 9% of the more than $1 trillion health care industry The question of advertising Ads for particular drugs These are not unexpected as new cures and remedies are invented. Feel-good political ads These ads are seen as a means to forestall price controls or regulations. Patents A patent is a right granted by government to an inventor to be the exclusive seller on an invention for a limited period of time. Patents motivate innovation with the promise of monopoly profit for a period of time. Orphan Drugs An Orphan Drug is one that treats someone with a disease that afflicts few people. The concern is that there is insufficient potential demand to motivate innovation. For orphan drugs the patent life is extended by several years. The Concern over High Prices Are . | Chapter 23 The Economics of Prescription Drugs Chapter Outline PROFITEERS OR BENEVOLENT SCIENTISTS MONOPOLY POWER AS IT APPLIES TO DRUGS IMPORTANT QUESTIONS Profiteers or Benevolent Scientists? Spending on drugs accounts for 9% of the more than $1 trillion health care industry The question of advertising Ads for particular drugs These are not unexpected as new cures and remedies are invented. Feel-good political ads These ads are seen as a means to forestall price controls or regulations. Patents A patent is a right granted by government to an inventor to be the exclusive seller on an invention for a limited period of time. Patents motivate innovation with the promise of monopoly profit for a period of time. Orphan Drugs An Orphan Drug is one that treats someone with a disease that afflicts few people. The concern is that there is insufficient potential demand to motivate innovation. For orphan drugs the patent life is extended by several years. The Concern over High Prices Are prescription drug prices too high? The answer to many depends on the impact of the disease. For “life or death” drugs price has been an ethical concern. The AIDS “cocktail” (a mix of drugs, used to fight the disease) originally cost $14,000 per patient per year. For “quality of life” drugs it has been less of a concern. Pepcid and Zantac (heartburn medications), Seldane and then Claritan (seasonal allergy medications) cost a great deal but have not raised as much ethical concern. The Impact of Monopoly Power P* Q* MR D MC Q/t P Monopoly vs Perfect Competition MR Pmonop Qmonop D MC=Supply Q/t P PPC QPC A F B C E Under PC CS=PPCAC PS=FPPCC Under Monopoly CS=PmonopAB PS=FPmonopBE DWL=EBC Deadweight Loss Deadweight Loss (DWL) is the loss in social welfare associated with production being too little or too great. In the case of monopoly, production is too little and prices are too high. Important Questions Are prescription drugs expensive necessities or relatively inexpensive godsends? Expensive