Transcript Market for AIDS Drugs

Deliberations Begin for the Economics
Prize
According to Michael Kremer, what has
discouraged AIDS research?
The lower prices drug manufacturers charge for
AIDS drugs in Africa make them less profitable to
produce. Therefore, the drug manufacturers are
not interested in developing new AIDS drugs.
Is Kremer’s premise consistent with economic
theory?
P
Market for AIDS Drugs
Demand
Supply1
Q
P
Market for AIDS Drugs
Demand
P1
Supply1
.
Q
P
Market for AIDS Drugs
Demand
PC
.
Supply1
shortage
Q
Drug Producer’s Cost Structure
$100
$90
$80
Average
$70
Cost
$60
Average Variable
$50
$40
$30
$20
$10
Marginal
$0
0
10
20
30
Quanity
40
50
Drug Producer’s Cost Structure
Profit=0
$100
$90
$80
Average
P=AC
$70
Cost
$60
Average Variable
$50
$40
$30
$20
$10
Marginal
$0
0
10
20
30
Quanity
40
50
Drug Producer’s Cost Structure
$100
With price concessions
$90
$80
Average
$70
Cost
$60
Average Variable
$50
$40
$30
$20
$10
Marginal
$0
0
10
20
30
Quanity
40
50
Drug Producer’s Cost Structure
Profit<0
$100
$90
$80
Average
P<AC
$70
Cost
$60
Average Variable
$50
$40
Loss
$30
$20
$10
Marginal
$0
0
10
20
30
Quanity
40
50
Drug Producer’s Cost Structure
R&D increases shortrun fixed costs.
$100
$90
$80
Average
$70
Cost
$60
Average Variable
$50
Loss
$40
$30
$20
Marginal
$10
$0
0
10
20
30
Quanity
40
50
P
Market for AIDS Drugs
Demand
Supply1
Supply2
Advances in technology for
producing AIDS drugs would
shift out the supply curve.
PC
.
Q
Deliberations Begin for the Economics
Prize
What does ?? Suggest as a solution to the
drug problem?
Increase the cost of selling drugs.
Would it work?
P
Market for Addictive Drugs
Demand
Supply1
P1
.
.
Q
Q1
Demand is perfectly inelastic.
P
Market for Addictive Drugs
Demand
Supply2
P2
.
P1
.
.
Q1
Supply1
Increasing the cost of
providing drugs makes
the supply curve steeper,
increasing price with no
change in quantity
consumed.
Market for Addictive Drugs
How will drug addicts get the money to
maintain their habit when the price of drugs
increases?
Stealing
Prostitution
Dealing Drugs
Deliberations Begin for the Economics
Prize
Does economic theory predict that retailers
should sell products for lower prices on the
internet than in their stores?
Retailer’s Cost Structure
The cost structure for selling in-store is higher
than the cost structure for selling on-line.
In Store
On-line
Average
$12
$12
$10
$10
$8
$8
$6
Average Variable
$4
Cost
Cost
Average
Average Variable
Marginal
$6
$4
Marginal
$2
$2
$0
0
10
20
30
Quanity
40
50
$0
0
10
20
30
Quanity
40
50
Retailer’s Cost Structure
The MC curve above the minimum of
the AVC curve is the supply curve.
In Store
On-line
Average
$12
$12
$10
$10
$8
$8
$6
Average Variable
$4
Cost
Cost
Average
Average Variable
Marginal
$6
$4
Marginal
$2
$2
$0
0
10
20
30
Quanity
40
50
$0
0
10
20
30
Quanity
40
50
Market Equilibrium
Each of the 1,000
producers have this
supply curve.
In-store
$12
$10
Price
$8
$6
$4
$2
$0
0
10
20
30
Quantity
40
50
Market Equilibrium
The market supply curve will be the sum
of the 1,000 supply curves.
In-store
$12
$12
$10
$10
$8
$8
Price
Price
Market
$6
$6
$4
$4
$2
$2
$0
$0
0
10
20
30
Quantity (1,000's)
40
50
0
10
20
30
Quantity
40
50
Market Equilibrium
The market price is determined
by the intersection of the market
supply and demand curves.
In-store
$12
$12
$10
$10
$8
$8
Price
Price
Market
$6
$6
$4
$4
$2
$2
$0
$0
0
10
20
30
Quantity (1,000's)
40
50
0
10
20
30
Quantity
40
50
Market Equilibrium
25,000 units will be purchased at $8 in store.
In-store
$12
$12
$10
$10
$8
$8
Price
Price
Market
$6
$6
$4
$4
$2
$2
$0
$0
0
10
20
30
Quantity (1,000's)
40
50
0
10
20
30
Quantity
40
50
Market Equilibrium
The demand curves for each retailer
are horizontal at the market price.
In-store
$12
$12
$10
$10
$8
$8
Price
Price
Market
$6
$6
$4
$4
$2
$2
$0
$0
0
10
20
30
Quantity (1,000's)
40
50
0
10
20
30
Quantity
40
50
Market Equilibrium
Each retailer will sell 25 units.
In-store
$12
$12
$10
$10
$8
$8
Price
Price
Market
$6
$6
$4
$4
$2
$2
$0
$0
0
10
20
30
Quantity (1,000's)
40
50
0
10
20
30
Quantity
40
50
Retailer’s Cost Structure
In Store
Average
$12
$10
Cost
$8
$6
Average Variable
$4
Marginal
$2
$0
0
10
20
For the 25,000 units sold in store,
Price = Per Unit cost = $8
and Profit = $0.
30
Quanity
40
50
Market Equilibrium
If the 1,000 retailers also sell on-line, the
on-line supply curves will be added to the
market supply curve.
In-store
On-line
$12
$12
$10
$10
$10
$8
$8
$8
$6
Price
$12
Price
Price
Market
$6
$6
$4
$4
$4
$2
$2
$2
$0
$0
$0
0
10
20
30
40
50
Quantity (1,000's)
60
70
0
10
20
30
Quantity
40
0 50 10
20
30
Quantity
40
50
Market Equilibrium
The market prices drops to $7.
In-store
On-line
$12
$12
$10
$10
$10
$8
$8
$8
$6
Price
$12
Price
Price
Market
$6
$6
$4
$4
$4
$2
$2
$2
$0
$0
$0
0
10
20
30
40
50
Quantity (1,000's)
60
70
0
10
20
30
Quantity
40
0 50 10
20
30
Quantity
40
50
Market Equilibrium
The retailers’ demand curves fall to $7.
In-store
On-line
$12
$12
$10
$10
$10
$8
$8
$8
$6
Price
$12
Price
Price
Market
$6
$6
$4
$4
$4
$2
$2
$2
$0
$0
$0
0
10
20
30
40
50
Quantity (1,000's)
60
70
0
10
20
30
Quantity
40
0 50 10
20
30
Quantity
40
50
Market Equilibrium
Each retailer will sell 23 units in
store and 38 units on-line.
In-store
On-line
$12
$12
$10
$10
$10
$8
$8
$8
$6
Price
$12
Price
Price
Market
$6
$6
$4
$4
$4
$2
$2
$2
$0
$0
$0
0
10
20
30
40
50
Quantity (1,000's)
60
70
0
10
20
30
Quantity
40
0 50 10
20
30
Quantity
40
50
Retailer’s Cost Structure
In Store
Average
$12
For the 23,000 units sold
in store,Price = $7,
Per Unit cost = $8.25
and Profit = -$1.25.
$10
Cost
$8
Loss = $28.75
$6
Average Variable
$4
Marginal
$2
$0
0
10
20
30
Quanity
40
50
In the long run,
retailers would shut
down their in-store
operations.
Retailer’s Cost Structure
For the 38,000 units
sold on line,Price = $7,
Per Unit cost = $6 and
Profit = $1
On-line
$12
$10
Average
Average Variable
Cost
$8
Profit = $38
$6
$4
Marginal
$2
$0
0
10
20
30
Quanity
40
50
Retailer’s Net Profit
Profit = $38 - Loss = $28.75
Net Profit = $9.25
Market demand for a product is
divided between in-store and on-line.
In-store Demand
On-line Demand
$12
$12
$10
$10
$10
$8
$8
$8
$6
Price
$12
Price
Price
Market
$6
$6
$4
$4
$4
$2
$2
$2
$0
$0
0
10
20
30
40
Quantity
50
60
70
0
$0
10 20 30 40 50 60 70 800 9010 20 30 40 50 60 70 8
Quantity
Quantity
Retailer’s Cost Structure
In Store
On-line
Average
.
$12
AC = P
$10
$12
$10
$8
$6
Marginal
Demand
$4
.
AC = P
$8
Average Variable
Cost
Cost
Average
$6
$4
Demand
$2
Since the cost structure differs Average Variable
Marginal
between in-store and on-line
sales, the zero profit price varies.
$2
$0
$0
0
10
20
30
Quanity
40
50
0
10
20
30
Quanity
40
50
Some people will switch from in-store when
to on-line because of the lower price.
In-store Demand
On-line Demand
$12
$12
$10
$10
$10
$8
$8
$8
$6
Demand
$4
$6
$4
$2
$2
$0
$0
0
10
20
30
40
Quantity
50
60
70
Price
$12
Price
Price
Market
$6
$4
Demand
0
$2 Demand
$0
10 20 30 40 50 60 70 800 9010 20 30 40 50 60 70 8
Quantity
Quantity
Retailer’s Cost Structure
The cost structure for selling in-store is higher
than the cost structure for selling on-line.
In Store
On-line
Average
$12
$12
$10
$10
$6
Average Variable
$8
Average Variable
Cost
Cost
$8
Average
$6
Marginal
$4
Marginal
$4
Demand
$2
$2
$0
$0
0
10
20
30
Quanity
40
50
Demand
0
10
20
30
Quanity
40
50
Retailer’s Cost Structure
The cost structure for selling in-store is higher
than the cost structure for selling on-line.
In Store
On-line
Average
$12
$12
$10
$10
$6
Average Variable
$8
Average Variable
Cost
Cost
$8
Average
$6
Marginal
$4
$4
$2
$2
$0
$0
0
10
20
30
Quanity
40
50
Marginal
0
10
20
30
Quanity
40
50
In the New Economics, the Economy Has
Little to Do with It
What were the major findings in Steven
Levitt’s paper on legalization of abortion and
the decrease in crime rates?
A negative correlation between legalization of
abortion and crime rate.
A negative correlation between number of
abortions and crime rate.
In the New Economics, the Economy Has
Little to Do with It
How does Levitt’s interpret the findings?
The legalization of abortion in the early 1970’s
played a key role in lowering crime by reducing
the number of unwanted youths.
Abortion explained nearly half of the decline in
crime rates in the 1990’s.
Many women getting abortions tended to raise
children who committed crimes as teens.
Abortion might have reduced the number of
unwanted teens who came of age in the 1980’s
and 1990’s.
In the New Economics, the Economy Has
Little to Do with It
What are the strengths of the study?
They compared changes in crime rates across
states that legalized abortion at different times.
Hypothetical Example: 1980-1985
Decrease in
Abortion
State
Legalized (Y/N)
Crime Rate
1
Y
20
2
Y
22
3
N
15
N
18
4
Y
25
5
In the New Economics, the Economy Has
Little to Do with It
Crime decreased more in states with legalized
abortion.
Hypothetical Example
Abortion
State
Legalized (Y/N)
1
Y
2
Y
3
N
N
4
Y
5
Decrease in
Crime Rate
20
22
15
18
25
In the New Economics, the Economy Has
Little to Do with It
What are the strengths of the study?
They compared in abortion rates to decreases
in crime rates.
Hypothetical Example: 1990
Decrease in
Abortion
State
Rate
Crime Rate
1
10
20
2
11
22
3
5
15
8
18
4
12
25
5
In the New Economics, the Economy Has
Little to Do with It
Crime decreased more in states with higher
rates of abortion.
Hypothetical Example
Abortion
State
Rate
1
10
2
11
3
5
8
4
12
5
Decrease in
Crime Rate
20
22
15
18
25
In the New Economics, the Economy Has
Little to Do with It
What are the shortcomings of the study?
Does not adequately estimate the impact of the
recession of the handgun and crack epidemic of
the late 1980’s and early 1990’s.
A decrease in the use of crack in the late 1990’s
would also decrease the crime rate.
In the New Economics, the Economy Has
Little to Do with It
What are the social implications of the study?
Affluent older women did not benefit most
from legalized abortion.
Crime may be curtailed by limiting the number
of births among a few select groups.