Economics of Marijuana: Supply, Demand and Associated Laws - Research Paper Example

? Economic of Marijuana Supply, Demand and Associated Laws This study can help analyze the vast untapped market in marijuana that can givehuge dividends, if a little caution is applied. Also, it helps to understand the dynamics of demand and supply in this field. Personally, this study highlights the health impact of marijuana and the drug as an economic commodity. The dynamics of Demand and Supply can be used to study the economic aspects of a vast number of goods, spanning from daily goods like rice and salt to luxury goods like cars and wine to detrimental goods like cigarettes, drugs and alcohol. One such good is Marijuana, a powerful mood-altering drug that stimulates the brain and causes what is called a high. With the help of the theory of demand and supply, the economic aspect of marijuana can be scrutinized well. There are two parts to the analysis of Marijuana in economic terms – Marijuana as a harmful drug and Marijuana as a beneficial medicine. The paper will begin with the research with a concise theory on demand and supply. Effective Demand for a commodity can be defined as “demand backed up by enough money to pay for the good demanded.” (Stonier and Hague, 1980, p.18) Demand for a commodity depends on a number of factors. They are as follows. Price of the commodity (Px): This is the most important determinant of the quantity demanded. “The price of a good and the quantity the buyers are willing to purchase in a defined time period, ceteris paribus” (Tucker, 2011, p.59) exist in an inverse relationship with each other. This is known as the Law of Demand. It has been explained by the help of a graph. In the given figure, quantity demanded of a good increases from from q1 to q2 for a fall in price of p1 the good from p1 to p2. This shows that there is an inverse relationship between these two. p2 q1 q2 Quantity demanded However, there are some exceptions to the law of demand, in which case quantity demanded does not necessarily increase with a decrease in price and vice versa. Let us examine those exceptions. One of the most important exceptions to the law of demand is the Snob Effect. Some goods have a snob value like diamonds, Ferraris, etc. A decrease in the price of these goods will result in a fall in their demand, even if the quality of the good remains unchanged, as it will reduce their snob appeal. Some goods are known as Bads, e.g, Tobacco, Cigarettes, gutkas and so on. The demand for these goods is independent of price because the people buying them are addicted to them. So, their demand for these goods remains constant and may even increase with an increase in the price. “People often do and believe things because many other people do and believe the same things” (Miller, Vandome and McBrewster, 2009, p.76). This may be due to the desire to conform to a particular group or class and is called the Bandwagon Effect. Number of Buyers (n): As the number of buyers in the market increases, the quantity demanded of good increases. This is the reason that a population explosion results in an increase in aggregate market demand, at the same level of prices. An increase in demand at the same level of prices results in a rightward shift of the demand curve. So, now at p1, qty demanded will be more than q1. Tastes and Preferences (T): A change in tastes and preferences of the consumer may result in an increase or decrease in demand. Advertising, Fads, Fashions have a tangible effect on demand, in this respect. Income (I): Income affects demand in two ways for two different cases. For normal goods, demand increases with an increase in income. As income rises, more of a good becomes affordable. For example, the demand for goods like cars, wine, consumer goods increases with an increase in income. For Giffen (or inferior) goods like used cars, clothes bought at a discount, etc, demand decreases with an increase in income. Supply, too, depends upon a host of factors, just like demand. The determinants of supply are as follows. Price of the Commodity (Px): Supply, too, depends on the price of the good most. However, unlike demand for a good, quantity supplied has a positive relation with the price of the good. It increases with an increase in price and vice versa. Graphically, it can be represented as follows. Price An increase in price from p1 to p2 leads to an increase in the quantity supplied of the good from q1 to q2. This is because the profit to be p2 made increases with an increase in price. p1 q1 q2 Number of sellers (m): An increase in the number of sellers leads to an increase in the quantity of goods supplied. So, “if the number of alligator hunter increases, the supply curve for alligator skin and meat increases” (Tucker, 2010, p.62) Resource Prices (R): The prices of raw materials for production, labor and capital all affect supply of a good. The increase in price of natural resources or wages or interest on capital will show a downward trend in supply. Taxes and Subsidies (S): Taxes and Subsidies affect supply in reverse ways. The supply of commodities increases with an increase in subsidies and decreases with an increase in taxes like sales taxes. Now that the theory of demand and supply has been illustrated, we will look at the market equilibrium at which the demand curve and the supply curves intersect and trade takes place. Equilibrium in the Market The price at which a buyer is willing to buy and a seller is willing to sell a certain commodity is the point where equilibrium occurs. It has been graphically shown in the figure. Price Equilibrium occurs at price P and quantity Q and here, qty demanded is equal to qty supplied. P Q Quantity The Economic Aspect of Marijuana Demand Research shows that the demand for marijuana is very high with around 2.5% of the regular users being from UK, USA and Australia. This may be due to the high standards of living in the developed countries and more disposable income in the hands of adults as well as children. The highest number of users is Americans who are as young as 10th graders. Next highest percentage of users is Europeans with North Europe’s 19% and South Europe’s 14% population being regular users. (Selvanathan and Selvanathan, 2005, p.109) Supply Supply of marijuana is relatively lower than its demand. The reason for this may be that international trade in the drug is still not legalized and it is still identified as a form of trafficking. Therefore, it is obvious that its price will be relatively higher. Of course, where it is grown locally, prices may vary greatly but on an average this drug is costly as there are a number of taxes, customs and tariffs on it, not to mention, its trade is counted as a punishable offence. Marijuana as a ‘Bad’: A Harmful Drug Marijuana is said to cause a number of health hazards. The continuous use of the drug leads to “pre-cancerous changes in lung cells” (Coon, 2006, p.250). Apart from this, it may lead to a fall in fertility rates in both men and women as has been made evident from research, damage to genes that can be passed on to off springs and a serious memory loss in human beings. In spite of these facts the demand of marijuana as a stimulating drug has not declined, to say the least. As a Bad, its demand will be independent of its price since addicts will always demand more and more and more of it. So, the demand for will be an exception to demand and thus, the demand curve will be upward sloping. Graphically, it can be shown as follows. The demand for marijuana may remain constant, as shown in the first figure or even increase, as shown in the second figure, with an increase in its price. Price Price Quantity Demanded Quantity Demanded This unusual behavior of the demand curve could be due to a number of reasons. The first and foremost reason is, of course, that it is largely demanded by addicts. Another reason may be that due to the population explosion in recent times the demand has multiplied. Yet another reason may be because it has some sort of Snob Value so that it shows a positive relation between its price and demand. Bandwagon effect is also evident, here. It may be considered fashionable to smoke marijuana in a particular class or society and so its demand may increase or remain constant even when price rises. Supply of marijuana is the usual upward sloping curve and there is no unusual behavior in this case. Combining the demand and supply, we will have two equilibrium conditions, given by the figures below. D D S S P P S S D Q Q In the first figure, equilibrium occurs at the intersection of a vertical constant demand curve and an upward sloping supply curve whereas in the second figure, equilibrium occurs where an upward sloping demand and supply curve meet. In this case, since both are positively related to price, price will keep on increasing with no downward pressure on it. Marijuana as a Medicine Although marijuana’s role as a harmful drug is more popular, what is little known is that it was “largely used for medicinal purposes, mostly in Asia, Africa and Mid-East” (Selvanthan and Selvanthan, 2005, p.109). It was used for the treatment of malaria and to provide relief from pain in childbirth. As a medicine, it can be used as a “sedative and stimulant” (Bello, 2008, p.29). The consumption of marijuana results in a “highly functional, relaxed system” (Bello, 2008, p.30). Also, consuming it makes one more conscious visually and audibly. Demand for marijuana as a medicine will be represented by a normal downward sloping demand curve as given in the first figure. Demand for it will decrease with an increase in its price as cheaper alternatives will be used as medicines. The supply curve will remain upward sloping as usual, shown in the second figure. This is because supply of marijuana will increase with increase in its price. Now, a favorable policy by the government like legalizing the use of Marijuana may result in an increased supply and the supply curve will move downwards. Price Price P Q1 Q2 Quantity Demanded Quantity Supplied In the second figure, qty supplied increases from Q1 and Q2, at the same price level P. The comparative dynamics can be shown by the following figure. Equilibrium shifts from point A to point B, D S1 as supply increase from Q1 to Q2. The S2 result is a fall in price from P1 to P2. P1 P2 D Q1 Q2 It may be concluded that the scope of business in marijuana is vast but the general health of the people must be kept in mind. In moderation, this commodity may prove beneficial as a medicine; it is its overuse that we must be cautious about. So, its use in moderation and thus, trading in it may safely be legalized to allow more innovations in the field of medicine. References Bello, J (2008). The Benefits of Marijuana: Physical, Psychological and Spiritual. Pennsylvania: Lifeservices Press. Coon, D (2006). Psychology: a Modular Approach to Mind and Behavior. USA: Thompson Learning Inc. Lewis, G.H (1886). The Fortnightly Review, Volume 6. London: Chapman and Hall. Miller, F.P, Vandome, A.F and McBrewster, J (2009). Bandwagon Effect. VDM Publishing House Ltd. Selvanathan, S and Selvanathan, E.A (2005). The Demand for Alcohol, Tobacco and Marijuana: International Evidence. England and USA: Ashgate Publishing Co. Ltd. Schotter, A (2009). Microeconomics: A Modern Approach. USA: Nelson Education Ltd. Stonier, A.W and Hague, D.C (1980). A Textbook of Economic Theory, 5E. New Delhi: Pearson Education Ltd. Tucker, I.B (2011). Macroeconomics for today. USA: IMAGEMORE Co. Ltd. Tucker, I.B (2010). Survey of Economics. USA: Nelson Education Ltd. Read More