A joint operation by the British and Australian navies last month resulted in the largest ever haul of heroin at sea. The drugs weighing 1,032 kilogrammes had an estimated British street value of more than £140 million and were found on a boat 30 miles off the coast of East Africa near Kenya and Tanzania.
This is great news for the authorities but what link does this have with the exams?
Price elasticity of demand (PED) is a core area of pricing theory. PED measures the sensitivity of customer demand to a change in prices and is calculated as
PED = % change in demand
% change in price
There is usually an inverse relationship: when price goes up, demand goes down (and vice versa).
Addictive drugs such as the heroin seized by the British and Australian navies however are an inelastic product and in fact are approaching perfect inelasticity. A perfectly inelastic product is a situation where price goes up but the quantity demanded stays the same. In the case of addictive drugs, the drug addicts will still need their “fix” so the quantity demanded by them is largely unaffected by price increases.