Ch 4 Handout-Elasticity

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Chapter 4 Handout Elasticity I. Introduction and Overview In chapter 3 we analyzed demand and supply. The demand curve shows an inverse relationship between price of a good and quantity demanded. How does the shape of a demand curve differ between products or an individual’s preference to a product? For example, society believes that drug use is a problem. Legal drug use is controlled by licensing doctors and pharmacists to sell drugs. No such means exist for drugs that society deems illegal especially drugs that are habit forming. There are many ways to solve the problem of illegal drug use. Solutions range from making these drugs legal to severe punishment from using or distributing drugs. In our society we have decided to punish users and distributors as well as make efforts to stop the flow of drugs into the US. Punishment means more than putting people in prison but putting in place other restrictions such as ‘if you test positive for drug use you are fired from your job’. Drugs are habit forming and are not free. The problem users have is how to pay for the habit. Since drugs are habit forming, we may conclude that the buyers (drug uses) are less sensitive to price for these drugs than other goods. This is reflected in a demand curve like the one below: What happens to the market for illicit drugs if we have extra border patrols? 1
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Chapter 4 Handout Elasticity Notice the impact is more money among fewer drug suppliers. There is a 60% increase (+) in price and only a 20% decrease (-) in usage. WHY??? II. Price Elasticity of Demand (E d ) A. Price elasticity of demand is the percentage change in quantity demanded that results from a 1 percent change in price. % 20
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This note was uploaded on 02/01/2008 for the course ECON 2213 taught by Professor Murphy during the Spring '08 term at NSUOK.

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Ch 4 Handout-Elasticity - Chapter 4 Handout Elasticity I...

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