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Essay on 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…show more content…
as the price increases, there is a less than proportionate response to change to quantity demanded, and hence equilibrium quantity. (D) In reducing the quantity of pseudoephedrine coming into New Zealand, Customs and the Police are reducing the potential production of P. in effect, officials are increasing the scarcity of P in NZ, although this may seem positive, it may encourage producers of P to increase quantity supplied. This is because the recently increased scarcity causes producers to reduce supply, causing a leftwards shift of the supply curve, hence the equilibrium price increases (as shown on diagram 1). This is due to the inelastic nature of price for demand of P, as well as the elastic nature of price for supply of P. It is this price elasticity for supply of P that results in the producers of P increasing quantity supplied by a greater proportion than the change in price. The perverse incentive for producers of P in this case would be increased equilibrium price, which, according to the law of supply and the supply price elasticity associated with P, would cause producers to increase supply. (E) Demand side methods used to combat the use of trade of P in NZ would be more effective than supply-side methods. As shown in diagram 2, demand-side effects used by officials to control P result in greater decreases in the equilibrium quantity, than compared to diagram 1, where supply-side methods are used to control P. In this
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