It is no secret that drug prices are on the rise. Pharmaceutical companies across the nation are gaining large profits through their hold on such a vital resource. Due to the qualities [m1]that characterize pharmaceutical drugs, companies are able to drive up prices without fearing sufficient decreases in profit. Corporate leaders are aware of their position because drugs are an inelastic good. Therefore, they are able to increase their total revenue by increasing the price of their good. The situation becomes more complex, however, because people on the other side of the equation are lashing out against the high prices cast on consumers by urging the government to enact interventions that will help to allocate the good to those who need it most.

Due to the inelastic nature of the demand for  prescription drugs, companies are able to drive up prices without fearing a drastic decrease in demand. When the price elasticity of a good is low, a change in price results in only a minor change to quantity demanded. Mathematically, this is true because the formula for determining price elasticity involves finding the change in percent quantity demanded, and dividing it by the percent change in price. If the result bears a number less than one, the good is considered inelastic.

Inelastic Good

Price

P2

P1 D

Q2 < — Q1 Quantity

Graphically, this phenomenon would result in a steeper demand curve as the price offered by producers moves along the demand curve. Thus, By increasing the price of a medication, drug companies can reap a greater profit as they know that consumers will continue to purchase the good even at a higher price. Drugs are an inelastic good because typically there are no close substitutes. If an individual has a certain illness or disease that is treatable by taking a certain drug, the individual will have little choice but to become a consumer of the good. In addition, because drugs are a necessity and not a luxury: if you need a medication, you literally can not go without it.