Principles of Economics- Mankiw (5th) 109

Principles of Economics- Mankiw (5th) 109 - P 2 1 Quantity...

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CHAPTER 5 ELASTICITY AND ITS APPLICATION 113 short periods of time because higher prices do not substantially affect drug use by established addicts. But demand may be more elastic over longer periods of time because higher prices would discourage experimentation with drugs among the young and, over time, lead to fewer drug addicts. In this case, drug interdic- tion would increase drug-related crime in the short run while decreasing it in the long run. QUICK QUIZ: How might a drought that destroys half of all farm crops be good for farmers? If such a drought is good for farmers, why don’t farmers destroy their own crops in the absence of a drought? CONCLUSION According to an old quip, even a parrot can become an economist simply by learn- ing to say “supply and demand.” These last two chapters should have convinced you that there is much truth in this statement. The tools of supply and demand allow you to analyze many of the most important events and policies that shape
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Unformatted text preview: P 2 1 Quantity of Drugs Q 2 1 Price of Drugs Demand S 2 1 2 1 (a) Drug Interdiction Quantity of Drugs Price of Drugs Supply D 2 1 (b) Drug Education 3. . . . and reduces the quantity sold. 2. . . . which raises the price . . . 2. . . . which reduces the price . . . 1 2 1. Drug interdiction reduces the supply of drugs . . . 1. Drug education reduces the demand for drugs . . . 3. . . . and reduces the quantity sold. Figure 5-10 P OLICIES TO R EDUCE THE U SE OF I LLEGAL D RUGS . Drug interdiction reduces the supply of drugs from S 1 to S 2 , as in panel (a). If the demand for drugs is inelastic, then the total amount paid by drug users rises, even as the amount of drug use falls. By contrast, drug education reduces the demand for drugs from D 1 to D 2 , as in panel (b). Because both price and quantity fall, the amount paid by drug users falls....
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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