Page 499 - Krugmans Economics for AP Text Book_Neat

section 9

Module 46: Income Effects, Substitution Effects,
and Elasticity
Module 47: Interpreting Price Elasticity of Behind the
Demand
Module 48: Other Elasticities
Module 49: Consumer and Producer Surplus Demand Curve:
Module 50: Efficiency and Deadweight Loss
Module 51: Utility Maximization
Consumer Choice
Economics by Example:
“Why Was the Great Newspaper Heist So Easy?”

Panic was the only word to describe the situation at hos- A survey of pharmacists found that price-gouging was
pitals, clinics, and nursing homes across America in Octo- fairly widespread.
ber 2004. Early that month, Chiron Corporation, one of Although many people refused or were unable to pay
only two suppliers of flu vaccine for the entire U.S. mar- such a high price for the vaccine, many others undoubtedly
ket, announced that contamination problems would did. Med-Stat judged, correctly, that consumers of the vac-
force the closure of its manufacturing plant. With that cine were relatively unresponsive to price; that is, the large in-
closure, the U.S. supply of vaccine for the 2004–2005 crease in the price of the vaccine left the quantity
flu season was suddenly cut in half, from 100 million to demanded by consumers relatively unchanged.
50 million doses. Because making flu vaccine is a costly Clearly, the demand for flu vaccine is unusual in this re-
and time-consuming process, no more doses could be spect. For many, getting vaccinated meant the difference
made to replace Chiron’s lost output. And since every between life and death. Let’s consider a very different and
country jealously guards its supply of flu vaccine for its less urgent scenario. Suppose, for example, that the supply
own citizens, none could be obtained from other countries. of a particular type of breakfast cereal was halved due to
If you’ve ever had a real case of the flu, you know just manufacturing problems. It would be extremely unlikely, if
how unpleasant an experience it is. And it can be worse not impossible, to find a consumer willing to pay 10 times
than unpleasant: every year the flu kills around 36,000 the original price for a box of this particular cereal. In other
Americans and sends another 200,000 to the hospital. Vic- words, consumers of breakfast cereal are much more re-
tims are most commonly children, seniors, or those with sponsive to price than consumers of flu vaccine. But how
compromised immune systems. In a normal flu season, do we define responsiveness? Economists measure con-
this part of the population, along with health care workers, sumers’ responsiveness to price with a particular number,
are immunized first. called the price elasticity of demand.
But the flu vaccine shortfall of 2004 upended those In this section we take a closer look at the supply and de-
plans. As news of it spread, there was a rush to get the mand model developed in Section 2 and present several eco-
shots. People lined up in the middle of the night at nomic concepts used to evaluate market results. We will see
the few locations that had somehow obtained the vac- how the price elasticity of demand is calculated and why it is
cine and were offering it at a reasonable price: the the best measure of how the quantity demanded responds to
crowds included seniors with oxygen tanks, parents with changes in price. We will then discover that the price elastic-
sleeping children, and others ity of demand is only one of a
in wheelchairs. Meanwhile, some family of related concepts, in-
pharmaceutical distributors— cluding the income elasticity of de-
the companies that obtain vac- mand and the price elasticity of
cine from manufacturers and supply. We will look at how the
then distribute it to hospitals price and the quantity bought
and pharmacies—detected a and sold in a market affect con-
profit-making opportunity in sumer, producer, and overall
the frenzy. One company, AP Photo/Will Kincaid welfare. And we will consider
Med-Stat, which normally how consumers make choices
charged $8.50 for a dose, to maximize their individual
began charging $90, more than Because consumers are relatively unresponsive to the price utility, the term economists use
10 times the normal price. of flu vaccine, the price depends largely on availability. to describe “satisfaction.”
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