Answer to Question #132811 in Macroeconomics for Faheem ali Mirani

Question

: The U.S. government’s “war on drugs” mainly focuses on restricting supply. This drives up prices
and reduces quantity demanded. However, demand for many drugs is price inelastic. That means quantity
demanded does not drop as much as the price rises. The net effect is higher total revenue to drug
producers. Illustrate the said scenario in a graph.

Answer 1

Demand for many drugs is price inelastic even though there is an intervention in restricting supply. The diagram below shows a supply side intervention.

At the new equilibrium, the quantity of drug use has not changed much because of the offsetting effects of the supply-side intervention and the demand shift. However, the supply-side intervention will succeed in preventing drug use from increasing to Q3, which would have been the result if the demand had shifted in the absence of the intervention. In this case, the price increase from P1 to P3 is a valid indicator of the success of restricting supply.