Microeconomics Assignment

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(A) Methamphetamine is a highly addictive drug, hence there is a high necessity associated with it, which would mean that for users of the drug, demand would be inelastic. P is a reputed necessity, because it is a good which isn’t essential for survival, but many users simply think they have to have it. Because those who use P generally have a strong addiction and dependence to P, an increase in price, caused by reduced supply from increased seizures of precursors used in the manufacture of the drug, such as pseudoephedrine, would most likely result in a less than proportional change in quantity demanded. Despite this, not all users of P are completely addicted, and a price increase would cause some users to reduce quantity demanded. It is for this reason that there is some slope to the demand curve, meaning P the price elasticity demand for P is perfectly inelastic. (B) In contrast to the price inelasticity demand for consumers of P, producers of the drug would face an elastic supply curve. This is because producers of P would become more willing to increase quantity supplied as the price of P increases, in order to take advantage of greater monetary returns from the sale of their goods. However, because the majority of P producers are operating in the short run, their price elasticity isn’t as high as it could be, due to the supply of raw materials being fixed, and hence limited in quantity. (C) The decrease in the quantity of raw materials available used to produce P has caused a decrease in the quantity supplied of P, because less can be produced than previous (due to the shortage of pseudoephedrine). This resulting scarcity of P has caused P producers to increase the price of P. the equilibrium price has increased signif... ... middle of paper ... ...es are price makers, if it were to be legalized, this activity would most likely resume, as consumers would prefer access to the product without price or quantity regulations. The only way for the government to control the use of P is to attempt to contain the quantity being supplied, as well as reducing the quantity demanded. In my opinion, the best two tactics officials can use to attempt to control the quantities demanded and supplied are: • Persist with current supply-side policies, in an effort to greatly reduce the quantity of P being supplied in NZ. • Implement further drug education programmes, in an effort to reduce the willingness of consumers to consume P. Diagram 5 shows the impact of supply and demand side methods to control P, the equilibrium quantity is greatly reduced. Compare this with diagram 4, where a tax only has limited effect on quantity.
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