Products, Services, and Prices in the Free Market Economy

Abstract

A free market economy is a market where price is determined by the unregulated interchange of supply and demand (Wikipedia 2006). This free market economy allows American citizens, rather than government, to make decisions regarding economic activities and transactions. This allows businesses the luxury of providing goods or services at a cost that would benefit them financially. The business must decide whether to increase or decrease the price of a good or service in order to increase revenue. The City of Houston used the price of elasticity of demand by raising immunization prices with the intention of increasing revenue.

Products, Services, and Prices in the Free Market Economy

The City of Houston Health Department officials had to face a challenging dilemma. The immunization coverage rates were below standard. Children were not being immunized and the well being of the children were being compromised. Then the prices of the vaccines were to be raised by the supplying vendor. The City of Houston Health Department had to address the fact that children were not being immunized and the cost of the vaccines increased. The officials had to face the problem of costly vaccines and the risk of the immunization coverage rate to drop even lower. The price elasticity of demand would show that the service of providing shots will be highly elastic. The City of Houston officials would need to increase the cost of providing the shots to compensate the increase cost of the vaccines from the vendor. This would result in an even lower immunization coverage rate. The price elasticity of demand would be that the increase cost of providing shots will greatly decrease the immunization coverage rate. The revenue from the shots would decrease as a result.

In January 2005, the cost of immunizations went from three dollars to $15.OO dollars (City of Houston 2006). That is a dramatic increase. The City of Houston Health Department officials decided that increasing the price of the shots would do two things. One the increased price will compensate for the increased cost of the vaccines and two, the increased cost would increase the revenue. The City of Houston Health Department officials did not take into account that this would alter the immunization coverage rate. The officials assumed that the shots were a necessity and clients had to pay. At a private doctor, immunizations shots typically are priced from $45-$100 dollars. This being known, the officials figured raising the price to $15.00 would not decrease the immunization coverage rate. The officials would be satisfied if the immunization coverage rate remained the same and the revenue increased. This is not what occurred. The immunization coverage rate lowered (Immunization coverage rate in the Fifth Ward area of Houston was 8%. City of Houston) and the revenue for shots decreased. Parents of the children needing vaccines just withheld their children from getting shots, citing that the cost was too high to afford. The City of Houston Health Department provides services for indigent patients and any slight increase in price will affect them. The result will be children not receiving the proper vaccinations and the Health Department losing revenue. The increase of shot prices and the decrease of coverage rate and revenue is a problem that can be turned into an opportunity

The City of Houston Health Department officials should reconsider lowering the cost of providing immunization shots to children. By calculating the price elasticity of demand, it will show that the increase of price decreased greatly the coverage rate and revenue. This results in a high elastic demand. The vendors of the vaccines used the demand and supply model in that the City demanded vaccines and the vendors supplied them but at their cost. The City should first consider alternate vendors without compromising quality. Though there are a limited number of vaccine providers, the City can make an effort to negotiate a deal. By lowering the price of shots, the coverage rate and the revenue will increase. Prior to the price change, the coverage rate was acceptable and the City was generating revenue. The City should negotiate with another vendor and lower the prices of shots.

The risk of not decreasing the shot prices will lead to a drop in coverage rate and a loss of revenue. Patients will either refuse to take their children for shots or apply for federally funded assistance. If the prices were to be lowered, there would be little