4. How does a generic drug differ from its brand-name, previously patented equiv

Question

4. How does a generic drug differ from its brand-name, previously patented equivalent? Explain why the price of a brand-name drug typically declines when an equivalent generic drug becomes available? Explain how that drop in price affects allocative efficiency.

5. How does the demand curve faced by a purely monopolistic seller differ from that confronting a purely competitive firm? Why does it differ? Of what significance is the difference? Why is the pure monopolist's demand curve not perfectly inelastic?

6. U.S. pharmaceutical companies charge different prices for prescription drugs to buyers in different nations, depending on elasticity of demand and government-imposed price ceilings. Explain why these companies, for profit reasons, oppose laws allowing re-importation of drugs to the United States.

Explanation / Answer

4) Generic Drugs do not differe from their brand name equivalents, they are chemically the same. The difference in the price is related to capitalized Research and Development costs. Brand name drug makers have multiple drugs fail for every drug that becomes a success. In addition, it costs them lots of money to research and develop those drugs. As a result they try to recoup these costs by charging a high price for their branded drugs. The price of a brand name drug declines because there are new entrants into the market.The brand name drug maker still wants to compete with the generic makers, thus they have to reduce prices. The price reduction is due to competitive pressures and an increase in supply. Because there is a large increase in supply, equilibrium prices for the drug drop and allocative efficiency is increased as there are more drugs available and at a cheaper price, meaning that people who could not afford the namebrand drugs before can now purchase the generic drugs at a lower price. 5) The demand curve for a monopolistic seller differes from a competitive firm because the in the monopoly, they can set prices and output. Because there are no competitors, they have constant demand and can charge any price they see fit. However, the demand curve is not perfectly inelastic because in the long run economic profit is always zero. In the short term their increased revenues will prompt new entrants into the market. 6) The reimportation of drugs to the US is opposed because the drug makers need to recouperate their losses from overseas sales by charging higher prices in the us (related to why drug prices are high in #4 above).

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