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The Effects of a Black Market Using Supply and Demand

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The Effects of a Black Market Using Supply and Demand
The Effects of a Black Market Using Supply and Demand

Black Market Supply and Demand Illustration - 1

Q: How can we show what happens when a product is made illegal using supply and demand analysis? What does a black market look like on a typical supply/demand chart?

Great question! Black markets are a subject which seem to come up in every freshman course.

To show what happens when a good is made illegal, we first need to illustrate what the supply and demand for the good looked like in the pre- black market days. We can do so by arbitrarily drawing a downward sloping demand curve (blue) and an upward sloping supply curve (red), as shown on this graph. Note that price is on the X-axis and quantity is on the Y-axis.

On the next page, we will show what happens when the government makes the product illegal, thus creating a black market.

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