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Three fundamental quesitons of economics
- What to produce with limited resources?
- How shall the resources be used in production?
- Who shall receive the resulting goods?
The study of how individuals and societies allocate their limited resources in attempts to satisfy their unlimited wants.
wants are greater than goods available to satisfy them
- how to produce
- what to produce
- who will produce what
- who is to receive what is produced
how much goods and services particular individuals receive
commodities/services used for producing goods and services
useful goods and services that are produced for consumption or further production
Factors of production
another term for inputs
Three categories of inputs
- Goods and service
Production-Possibility Frontier (PPF) Curve
- Societies have limited resources and technology
- Points outside the curve are unachievable.
- Points under the curve indicate that the economy has not attained production efficiency
cost of forgone alternatives of a decision
Opportunity costs for pharmacy students
- Direct Expenditure
- Tuition costs
- Missing out on work
- Satisfaction obtained from purchasing a particular good or service.
- Maximize utility within budget constraints
Utility < Cost
1st utility is ____ than 2nd utility for the same good.
Additional utility arising from consumption of an additional unit of the commodity
when cost of a commodity exceeds marginal utility then _______.
Law of diminishing marginal utility
A point is reached where consuming additional units would increase total utility but at a decreasing rate as marginal utility declines.
Law of Demand
- the quantity people are willing and able to buy is inversely related to the price.
- not the same as need or want.
Characteristics of a demand curve
- Negative slope
- demand is higher at lower prices.
Shift from right to left means demand _______.
Factors influencing change in demand
- price of related (substitute) goods (or complementary goods)
- income of the consumer
- number of consumers in the market
- attitudes, taste and preferences of the consumer
- consumer expectations with respect to further prices and incomes
Increase in price of brand name product = increase in demand for generic
Increased price of NSAIDS = decreased demand for antacids
Increase income = increased demand for goods
Number of consumers
Increase in population = increase in demand
Attitudes, tastes and preferences
Increase advertising = increase drug use
Fear of flu vaccine shortage = increased demand for flu vaccine
Less quantity demanded at each price
Demand curve shifts to the left
More quantity demanded at each price
demand curve shifts to the right
Increase income = increase demand
increase income = decreased demand
Law of Supply
the quantity of produvers are willing and able to provide varies with the price
Characteristics of a supply curve
- Positive slope
- positive relationship between price and supply
- Supply is higher at higher prices.
Shift from right to left of the supply curve means supply _____.
Factors influencing change in supply
- number of sellers in the market
- resource costs (materials and wages)
- Prices for related goods
- Sellers' Expectations
Substitutes affect on supply
Increase in reimbursement for generic = decrease supply of brand
Joint products effected by supply
Increase price of one product = increase in supply of a joint product
affect of resource costs on supply
increase production cost = decreased supply
Affect of production technology on supply
increase in technology = decrease in production cost = increase in supply
Affect of the number of sellers on supply
increased number of sellers = increased supply and decreased price
Less quantity supplied at each price = supply curve shifts to the _____.
more quantity supplied at each price = shift in supply curve to the _____.
Elasticity of demand
measure of the responsiveness of consumer demand to a change in price.
- price elasticity of a good is high
- qty. demanded changes greatly in response to price changes
- price elasticity is low
- quantity demanded responds little to price changes
- more horizontal line = elastic
- more vertical line = inelastic
If demand is elastic
- increasing price would reduce total revenue
- decreasing price would increase total revenue
if demand is inelastic
- increased price would increase TR
- decreased price would decrease TR
A producer's total revenue does not change with the change in the price of the good
What keeps price from rising infinitely?
- related goods
- government policies
- Gov't intervention
- managed care policies
- consumer's ability to purchase
Value of Elastic Demand
Ed > 1
Unitary Demand Value
Ed = 1
Inelastic Demand Value
Ed < 1
Importance of Elasticity
- Connection between change in price to total revenue
- Importance in determining what goods to tax
Three determinants of elasticity of demand
- availability of substitutes for the good
- price of a good relative to consumers' incomes
- number of alternative uses for the good
Elasticity of demand for prescription drugs
- Rx drugs have little substitutes
- Small portion of the patient's income is applied to the cost of the Rx
- Rx drugs have few alternative uses
Rx drugs have ______ demand.
Factors unique to Rx drug industry regarding elasticity of demand
- decision maker
- industry promotes differentiation of products
- third-party payment plans
Price elasticity of supply
estimates how much the quantity supplied of a good changes when its price is changed
Ed = (Change in Q / [Q1 + Q2 / 2]) / (Change in P / [P1 + P2 / 2])
shows consumer preference relative to their budget
Consumer equilibrium point
where the budget line is tangent to the indifference curve
Market equilibrium price
the point where quantity supplied is equal to the quantity demanded
shif in the demand curve to the left will reduce the quantity demanded of the product at every price
shift of the supply curve to the left reduces quantity supplied at each price
price is not legally allowed to fall below a minimum level
price is not allowed to rise above this maximum level
- exists with the seller offers the same good or service to different buyters at different prices even though the price of production to each buyer is the same.
- airline tickets
- movie tickets
- generics at walmart