Panic was the only word to describe the situation at hos-
pitals, clinics, and nursing homes across America in Octo-
ber 2004. Early that month, Chiron Corporation, one of
only two suppliers of flu vaccine for the entire U.S. mar-
ket, announced that contamination problems would
force the closure of its manufacturing plant. With that
closure, the U.S. supply of vaccine for the 2004–2005
flu season was suddenly cut in half, from 100 million to
50 million doses. Because making flu vaccine is a costly
and time-consuming process, no more doses could be
made to replace Chiron’s lost output. And since every
country jealously guards its supply of flu vaccine for its
own citizens, none could be obtained from other countries.
If you’ve ever had a real case of the flu, you know just
how unpleasant an experience it is. And it can be worse
than unpleasant: every year the flu kills around 36,000
Americans and sends another 200,000 to the hospital. Vic-
tims are most commonly children, seniors, or those with
compromised immune systems. In a normal flu season,
this part of the population, along with health care workers,
are immunized first.
But the flu vaccine shortfall of 2004 upended those
plans. As news of it spread, there was a rush to get the
shots. People lined up in the middle of the night at
the few locations that had somehow obtained the vac-
cine and were offering it at a reasonable price: the
crowds included seniors with oxygen tanks, parents with
sleeping children, and others
in wheelchairs. Meanwhile, some
pharmaceutical distributors—
the companies that obtain vac-
cine from manufacturers and
then distribute it to hospitals
and pharmacies—detected a
profit-making opportunity in
the frenzy. One company,
Med-Stat, which normally
charged $8.50 for a dose,
began charging $90, more than
10 times the normal price.
A survey of pharmacists found that price-gouging was
fairly widespread.
Although many people refused or were unable to pay
such a high price for the vaccine, many others undoubtedly
did. Med-Stat judged, correctly, that consumers of the vac-
cine were relatively unresponsiveto price; that is, the large in-
crease in the price of the vaccine left the quantity
demanded by consumers relatively unchanged.
Clearly, the demand for flu vaccine is unusual in this re-
spect. For many, getting vaccinated meant the difference
between life and death. Let’s consider a very different and
less urgent scenario. Suppose, for example, that the supply
of a particular type of breakfast cereal was halved due to
manufacturing problems. It would be extremely unlikely, if
not impossible, to find a consumer willing to pay 10 times
the original price for a box of this particular cereal. In other
words, consumers of breakfast cereal are much more re-
sponsive to price than consumers of flu vaccine. But how
do we define responsiveness? Economists measure con-
sumers’ responsiveness to price with a particular number,
called the price elasticity of demand.
In this section we take a closer look at the supply and de-
mand model developed in Section 2 and present several eco-
nomic concepts used to evaluate market results. We will see
how the price elasticity of demand is calculated and why it is
the best measure of how the quantity demanded responds to
changes in price. We will then discover that the price elastic-
ity of demand is only one of a
family of related concepts, in-
cluding the income elasticity of de-
mandand the price elasticity of
supply. We will look at how the
price and the quantity bought
and sold in a market affect con-
sumer, producer, and overall
welfare. And we will consider
how consumers make choices
to maximize their individual
utility,the term economists use
to describe “satisfaction.”Module 46:Income Effects, Substitution Effects,
and Elasticity
Module 47:Interpreting Price Elasticity of
Demand
Module 48:Other Elasticities
Module 49:Consumer and Producer Surplus
Module 50:Efficiency and Deadweight Loss
Module 51:Utility Maximization
Economics by Example:
“Why Was the Great Newspaper Heist So Easy?”
section
Behind the
Demand Curve:
Consumer Choice
9
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AP Photo/Will Kincaid
Because consumers are relatively unresponsive to the price
of flu vaccine, the price depends largely on availability.