Academic journal article American Journal of Pharmaceutical Education

Principles of Economics Crucial to Pharmacy Students' Understanding of the Prescription Drug Market

Academic journal article American Journal of Pharmaceutical Education

Principles of Economics Crucial to Pharmacy Students' Understanding of the Prescription Drug Market

Article excerpt

Many pharmacy schools have increased the amount of economics coursework to which pharmacy students are exposed in their prepharmacy and pharmacy curriculums. Students obtain competencies aimed at understanding the basic concepts of microeconomic theory, such as supply and demand. However, pharmacy students often have trouble applying these principles to real world pharmaceuticals or healthcare markets. Our objective is to make economics more relevant for pharmacy students. Specifically, we detail and provide pharmacy-relevant examples of the effects of monopoly power, barriers to marketplace entry, regulatory environment, third party insurance, information asymmetry and unanticipated changes in the marketplace on the supply and demand for pharmaceuticals and healthcare services.

Keywords: economics, drug pricing, manufacturing, supply and demand

INTRODUCTION

Most pharmacy schools require introductory level economics coursework prior to or during the didactic portion of the professional curricula. This coursework exposes students to basic concepts in microeconomic theory and applications, such as supply and demand, with the intent of helping students understand economic principles related to goods that are sold in a market. Typically, students learn how to predict the price and quantity for the perfectly competitive market for goods, which are products that are bought and sold. Advanced concepts related to market conditions, such as monopoly markets and barriers to entry typically are covered as well. The application of these market principles to pharmaceuticals or healthcare interventions often is missing or reflects a disconnect in the minds of pharmacy students. Pharmacy school curricula often do not bridge the gap to explain why pharmaceuticals and healthcare markets often do not behave in the same manner as perfectly competitive markets. As a result, many pharmacy students do not fully comprehend what makes the markets for drugs different. The objective of this article is to present economic principles in a context that is more relevant to pharmacy and pharmacy students. We provide some pharmacy-specific examples related to economic concepts in pharmaceutical markets. Since pharmacist training includes both clinical and business domains, these concepts will be relevant for students who are interested in administrative types of positions as well as management faculty members who train such students.

PRINCIPLES OF ECONOMICS WITHIN THE PHARMACEUTICAL INDUSTRY

Prior to examining how principles of economics influence the "market" for pharmacy-related goods (eg, prescriptions) and services (eg, medication therapy management), we suggest beginning with a didactic review of the simple supply and demand for goods sold in a perfectly competitive goods market. The perfectly competitive market provides a baseline reference, against which certain aspects of pharmaceuticals and healthcare goods and services can be compared to typical goods and services.

The Perfectly Competitive Market for "Goods and Services"

Economists typically define a market by examining the quantities of a good demanded and supplied at various price levels. The relationship between the quantity demanded and various prices is called the demand curve and is assumed to be a downward sloping curve; in contrast the supply curve shows the upward sloping set of points that graphically represents the relationship between prices and the quantity supplied. The point of intersection of the 2 curves characterizes the market equilibrium defined by a market price and the amount of goods traded. Among the underlying assumptions for the perfectly competitive market structure are: (1) there are a large number of sellers and buyers, of an identical good, all of whom are small relative to the size of the total market; (2) anyone is allowed to enter the market as either a buyer or as a seller; and similarly, buyers and sellers may leave the market without additional "shut down" costs; (3) there is no government intervention; (4) buyers pay the full cost of their purchases; (5) buyers and sellers have perfect information about the market; and (6) there are no external interventions, nor are there any interactions with other markets. …

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