Wednesday, March 6, 2013

Shortage of Attention Deficiency Drugs

In Prin. of Microeconomics I make an argument that a well functioning market will result in an equilibrium level of quantity in the marketplace.  By "equilibrium quantity" what I am trying to say is that at a given price the amount of output (or quantity) that consumers are willing and able to purchase is equal to the amount of output that producers are willing and able to produce in the market.  This is the best case scenario, and it is possible for small imbalances in the market over a short period of time, but incentives on either side exist such that these imbalances between the amount that consumers demand at a given price and the amount that producers supply at a given price will correct themselves.

So if this argument is correct, then why do shortages (a long term imbalance where the amount demanded by consumers is greater than the amount supplied by producers) exist?  Here is an example of a shortage that is taking place here in the US - in the attention deficiency drug market.  As you read through the article you will notice that this is being driven by the DEA quota (a government mandated maximum quantity that can be sold in the market).  What the quota does is restricts the amount that is supplied in the market, and thus the interplay of consumer demand and producer supply is unable to find the price that results in the amount of drugs produced to equal the amount of drugs consumed.  Firms that produce these drugs also can produce other drugs, and as such since the profits from producing these drugs seems to be less than in producing other drugs, the firms have an economic incentive to produce less of the lower returning drugs (i.e. attention deficiency drugs) and more of the alternative higher returning drugs.

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