Monday, December 20, 2010

Did you get a Flu Shot this year? If you did not, then you really messed up the market for flu vaccine. See the supply and demand analysis within! No, it is not as bad as having the flu, I promise...

WSJ: Flu-Shot Demand Droops; Prices Fall

""Drugstores, supermarkets and some doctors' offices are slashing prices or offering other kinds of deals on flu vaccine this year amid weaker-than-expected demand.

Last fall, hordes of worried parents, pregnant women and others drove demand for a limited supply of H1N1 flu vaccine as the swine-flu pandemic spread across the country, eventually infecting an estimated 61 million people in the U.S. and killing more than 12,000.

Demand for the separate, seasonal flu shot also was strong, largely because of the hysteria surrounding H1N1. Most venues ran out of seasonal flu vaccine by early November.

This year, supplies of the seasonal flu shots are bigger than ever: Manufacturers produced and distributed 163 million doses of the vaccine, compared with the 110 million doses distributed last year. Retailers and doctors' offices stocked up, pushing inoculations earlier and harder in the belief that heightened awareness of flu and a new government recommendation that all Americans over six months of age should get inoculated would drive strong demand....""

A couple of things are going on here that affected the market for flu shots.  There was an anticipation that the demand for flu shots would be greater than last year because of the swine flu epidemic and an increased awareness of the dangers of not being inoculated. In response to this anticipated demand, manufacturers increased the supply of vaccine, relative to the quantity produced last year. This is ripe for a basic supply and demand analysis...with graphs!!! 

The first graph shows the market in equilibrium BEFORE the market shift in demand and supply. Using the numbers in the article, the market price is $25 and the market quantity is 110 million, point "A". Assume the market "clears" at this price and quantity. 

The next graph shows the INCREASE in Supply of Flu Vaccine.  The Supply curve shifts to the RIGHT (S* to S1) to show that at every price, the quantity supplied of vaccine is 53 million units GREATER, relative to S* (163 million vs 110 million).
Simultaneously, we will assume the presumed anticipated increase in demand occurs. In the next graph, the demand curve shifts to the right (D* to D1), indicating that at every price, the quantity demanded of vaccine is 53 million units GREATER, relative to D* (163 vs 110). 
Our market is back at the same equilibrium price ($25) BUT at at higher market quantity (163 million), point "B".  It all works out, right???

The article suggests that Demand did not respond as anticipated for a variety of reasons.  Lets assume that Demand did NOT shift all BUT retailers and doctors did not recognize this immediately and the try to maintain the $25 price for the vaccine.  How does this affect the market?
Our market is out of equilibrium. Let's clear the clutter of this graph and look at simplified one below. At $25 the quantity demanded is 110 million units (point "A"), but the quantity supplied is 163 million units (point "B")--Quantity Demanded does not equal Quantity Supplied! In fact the Quantity Supplied EXCEEDS the Quantity Demanded by  53 million units, which means we have a SURPLUS of vaccine.

How does a market "clear" this surplus?  Shown below, by decreasing the price and moving ALONG the DEMAND curve (point "A" to Point "C") increasing the quantity demanded at the lower price. Moving ALONG the SUPPLY curve (Point "B" to "C"), decreasing the quantity supplied at the lower price. A new market clearing price ($15) and market quantity (140) are established. 

Full Disclosure: I am 50 years old and have never had a flu shot. I am playing with fire, I know.  Hmmm....what is the unseen consequence of this?.....Oh, right,....DEATH! Guess I should go get one...
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