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3.Demand for cocaine is highly inelastic and presents problems for law enforcement.  Stricter enforcement reduces supply, raises prices and revenues for sellers, and provides more incentives for sellers to remain in business.  Crime may also increase as buyers have to find more money to buy their drugs.

a.Opponents of legalization think that occasional users or “dabblers” have a more elastic demand and would increase their use at lower, legal prices.

b.Removal of the legal prohibitions might make drug use more socially acceptable and shift demand to the right.

II.Price Elasticity of Supply

A.The concept of price elasticity also applies to supply.  The elasticity formula is the same as that for demand, but we must substitute the word “supplied” for the word “demanded” everywhere in the formula.

Es = percentage change in quantity supplied / percentage change in price

As with price elasticity of demand, the midpoints formula is more accurate.

B.The ease of shifting resources between alternative uses is very important in price elasticity of supply because it will determine how much flexibility a producer has to adjust his/her output to a change in the price. The degree of flexibility, and therefore the time period, will be different in different industries. (Figure 6.4)

1.The market period is so short that elasticity of supply is inelastic; it could be almost perfectly inelastic or vertical.  In this situation, it is virtually impossible for producers to adjust their resources and change the quantity supplied.  (Think of adjustments on a farm once the crop has been planted.)

2.The shortrun supply elasticity is more elastic than the market period and will depend on the ability of producers to respond to price change.  Industrial producers are able to make some output changes by having workers work overtime or by bringing on an extra shift.

3.The longrun supply elasticity is the most elastic, because more adjustments can be made over time and quantity can be changed more relative to a small change in price, as in Figure 6.4c.  The producer has time to build a new plant.

C.Applications of the price elasticity of supply.

1.Antiques and other non-reproducible commodities are inelastic in supply, sometimes the supply is perfectly inelastic.  This makes their prices highly susceptible to fluctuations in demand.

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