Marijuana legalization is about demand, supply, market structure and cost benefit analysis.

A Demand and Supply Lesson

by Elaine Schwartz    •    May 17, 2010

A recent NPR report on the changing status of marijuana in California is also a supply and demand story.

The story begins in 1983 when the Reagan administration sought to decimate pot production in California. As a result, supply would have decreased because growers were willing and able to produce less. With diminished supply, price soared to as much as $5,000 per pound. Recently, with legalized medical marijuana, a more tolerant law enforcement environment, and the competition between indoor and outdoor marijuana cultivation, supply and demand changes have resulted in a $2000 per pound price. Next November, if the vote is yes to legalize pot in California, how would you predict that supply and demand will shift?

Some analysts believe that if pot is legalized and its market expands, then marijuana will be controlled by large growers just like strawberries and lettuce. With strawberries and lettuce, growers sought to differentiate their produce through packaging. Does that mean that marijuana could be next? 

The Economic Lesson

A demand and supply graph can be drawn as an “X” in which the Y-axis represents all of the prices buyers and sellers are willing to select and the X-axis shows the different quantities. With demand sloping downward and supply sloping upward, the point at which they meet, the market price, is called equilibrium. By moving along each line and also by shifting them when conditions change, we can illustrate the sources of price changes.  

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