FIN30210 Lecture Notes - Lecture 6: Securities Fraud, Dont, Demand Curve

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8 Feb 2017
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Lesson 4 - Elasticity - IN ADDITION TO SLIDES
Martin Shkreli
Why did he say they need to raise the price of the drug for AIDS?
They weren’t making revenue with the previous price
Higher costs than just making the drug itself (than just the ingredients)
It’s underpriced compared to its peers
Which doesn’t actually matter because the peers that are selling
drugs were selling drugs for different diseases
There are NO substitutes for this drug so there’s no connection
there
Costs are going up (though not by 5,000%)
Taking the money and reinvesting it back into making a better drug
EXCEPT that didn’t occur at all
That’s why he got arrested securities fraud (investment fraud)
None of these costs would actually fall much on individuals. It was really going to
insurance companies.
Disguises all of these things as cost implications, but we debunked all of them.
This is where elasticity comes into play.
Price Elasticity of Demand
Measuring a responsiveness of the quantity demanded to changes in price
NOT SLOPE
Because it’s really difficult when you have different goods and you want to
compare them
Also, slope is very unit dependent
Slope can change depending on units
So need something that’s not unit-dependent and can compare different goods
Use
Percentage change in quantity
Percentage change in price
When you solve for elasticity, DON’T FORGET TO TAKE THE ABSOLUTE VALUE
Problem 4.1
So they’re saying it’s -2, but don’t need the negative sign when plugging it in.
Percentage change in quantity = 10%
And depending on which was positive or negative, the other (price or
quantity) would be the opposite if elasticity is negative in problem and the
same if it’s positive
The Midpoint Formula
Choose elasticity at the midpoint
So to solve a problem for elasticity using the midpoint formula, have to be
given two points on the graph
The Point Price Elasticity
It takes the demand curve and takes the derivative of the curve with respect to prices
Finding the slope
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