Law of Supply

The video above will help you understand the Law of Supply. But what happens to products that people really need but can't afford such as drugs or healthcare. Should the government impose price controls to limit the prices drug companies can charge?

Read this article from the Cato Institute. What happens to supply when prices are set artificially low?

http://www.cato.org/publications/commentary/problems-price-controls

Read this September 23, 2014 article from the Wall Street Journal:

NEW DELHI—The Indian government Monday reduced the ability of the country's drug-pricing regulator to set prices on some drugs after pharmaceutical companies complained that a surprise round of pricing caps earlier this year was hurting the industry.
The National Pharmaceutical Pricing Authority is allowed to set the prices of what are deemed "essential medicines," which means the drugs that are most used by the general populace. The authority also had the right to set a ceiling price on other medicines in "extraordinary circumstances" if it was in the public's interest.
As of Monday, the pricing authority's ability to expand its control of prices in extraordinary circumstances was withdrawn. It is now only allowed to set prices on the hundreds of medicines that are on the essential list.
In July the pricing agency capped prices for more than 100 diabetes and cardiovascular medicines that weren't considered essential by the government, a move that surprised pharmaceutical companies and investors.
Shares of France's Sanofi SA (SAN.FR -1.79%) 's Indian subsidiary plunged 10% July 14 on news of the price controls. The company was one of the worst-hit by the caps as it is one of the largest sellers of diabetes and heart medicines in India, analysts said. At the time Shailesh Ayyangar, head of the French drug maker's India operations said that the company was "shocked and disappointed" by the price cuts.
On Tuesday, shares of Sanofi India Ltd. (500674.BY -1.00%) were up more than 12%.
The latest order—which was posted on National Pharmaceutical Pricing Authority's website Tuesday—removes the authority's extraordinary price-capping powers, but doesn't reverse the July price caps, said Dilip Shah, head of the Indian Pharmaceutical Alliance, a trade group.
After the July caps industry analysts and executives warned that attempts to control the price of too many drugs in India could hobble the industry and even hurt consumers in the long run as smaller pharmaceutical companies go out of business. Forcing global pharmaceutical companies to sell their popular products at rock-bottom prices might leave little business for India's generic drug companies.

"Several companies have started withdrawing their products that are under price control which means availability is going down," said Mr. Shah.
For example, after the government capped the price of antibiotic Augmentin, many generic companies stopped making it and the inventor of the drug, GlaxoSmithKline (GSK.LN -1.88%) PLC, saw its market share shoot up, said Mr. Shah.
"If GSK's product is available at the same price as generics, why would doctors not prescribe GSK's product?" he said.


Assignment: After reading the articles, answer the following questions. If price controls fail to bring costs down, why do government policy makers continue to use them? What happened in India when price controls were enforced? Re-read the Cato article. How could free-market forces be used to lower drug prices? Write your answers down in a handwritten paper or e-mail and turn it in for your daily grade.