Question

The following graph shows the market for hard drugs, such as heroin, cocaine etc.

Market for hard drugs Price of hard drugs Demand $6------- $41--------- 7- A 96 104 Quantity of hard drugs

1. Calculate the price elasticity when price increases from $4 to $6. Is the demand price elastic?
2. Suppose the government tries to solve the drug problems by reducing the supply.

1. With the reduction of supply of hard drugs, will the percentage increase in price less than the percentage decrease in quantity? Will the revenue received by drug criminals increase?
2. Besides changing the revenue received by drug criminals, give one other negative unintended consequence resulted from the government policies of reducing the supply of hard drugs.
3. After the legalization of marijuana (a softer drug), what happens to price elasticity of demand for hard drugs? Show your answers with a graph.

Answer 1

a. Elasticity is a responsiveness to change in particular input. If it is price then price elasticity of demand (Ped) means the degree of responsiveness of demand to a change in price which is given by formula:

Ped= %change in quantity demanded/ % change in price

Generally with increase in price, demand goes down. If chocolates become expensive then demanded less.

In this case, price changes from $4 to $6 and quantity changes from 104 to 96

hence, % change in quantity = 7.47

hence, % change in price = 50

Ped = 7.47/50= 0.14

As value is less than 1 it shows demand is inelastic. For a higher change in price, a small change in quantity happens

b.i. If supply is decreased then prices will go very high with black markets as demand is inelastic. Price increase will be higher in %.Revenue will go up.

ii. Black markets.

iii. As supply will be higher due to legalization demand will become elastic as supply will be more than existing. Price drop will be higher.Prices drop from p1 to p2.

ئه م ئ = 2 به د م ار