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Principles of Economics Essay

Suggest how an economist would approach the problem of alcohol abuse.

Economics is about scarcity and choice. It is assumed that all human beings are rational thinkers hence would always choose to consume products that would give them maximum satisfaction or utility. Mankiw (2011, p. 6) argues that rational people ‘systematically and purposefully do the best to achieve objectives given available opportunity.’ Given a choice among alternatives and with scarce resources, one would evaluate the benefits and costs of consuming an extra unit of a product and would only take a decision only if marginal benefit is greater than marginal cost.

In this case, to solve the alcohol abuse problem, one has to consider marginal benefits and marginal costs derived from consuming an extra unit of alcohol and since excessive drinking has more costs than benefits, one would refrain from alcohol. The opportunity cost foregone by choosing to abuse alcohol is too high compared to satisfaction derived; money spent on alcohol can do many other things such as feeding the family, education for children, and investments among others. Besides, the person may have health problems thus adding to the costs. By considering all these factors, a rational person would refrain from alcohol abuse.

Heyne (2000) acknowledges the role played by incentives in directing behavior. For him, rational people usually respond to incentives or are induced to act by them. Assuming alcohol abusers are rational, imposing taxes on alcohol substances would eliminate the problem. This would follow the law of demand which states that other things being constant, if the price of a good increase, the quantity demanded of the good decreases. Taxes have the effect of increasing alcohol prices and this would automatically mean that the abusers would desist from alcohol consumption or cut their consumption.

Analyze how prescription drugs affect the demand and supply of other products and services in this country.

Prescription drugs are drugs prescribed by a medical officer to a patient and are regulated by legislation unlike the over-the-counter drugs which can be old to anyone. If a patient is under prescription drugs, he/she buys the drugs despite the price of the drugs. An increase or decrease in price of the drugs therefore has little or no effect on the quantity demanded by an individual (McCarthy & Schafermeyer, 2007). The drugs are provided by the National Health Insurance and have no close substitutes. The increase in price of the drugs thus affects all the sectors of healthcare industry such as patients and private insurers.

Due to increased costs, the private insurers are forced to increase the cost of their services in case they have to offer such drugs and this may lead to low demand for their services. The patients are also required to get medical prescriptions before obtaining the drugs thus the demand for the medicine may be low compared to over-the-counter drugs. Use of prescription drugs also has an effect on demand for other healthcare services such as hospitalization. The prescription drugs also affect supply of generic products as manufacturers have patents to supply the new drugs for some years.

Formulate a reason why elasticity of demand is an important consideration when analyzing the impact of a shift in supply and why the elasticity of supply is an important consideration when analyzing the impact of shift in demand.

The price elasticity of demanded which is percentage change in quantity demanded over percentage change in price shows consumers responsiveness to price changes. (McKenzie & Lee, 2006). It is an important consideration when analyzing the impact of a shift in supply and in determining if the firm should raise or lower its price. The supply curve is upward sloping showing a positive relationship between price and quantity supplied other things held constant. However, in long-run, those factors do change causing a shift in supply curve. Such factors include; input prices, technology, expectations and number of sellers in the market. For example, an increase in input prices such as labor would lead to a decrease in supply thus shifting the supply curve to the left.

This results in low output which is not able to satisfy the market demand thus pushing the prices up. An increase in prices according to the law of demand would lead to a fall in demand leading to excess supply and consequently fall in prices until an equilibrium is reached (Mankiw, 2011). However, the fall in quantity demanded will be determined by elasticity of demand. If the product has inelastic demand, an increase in price as a result of shift in supply would have no effect on demand thus suppliers would get more revenue. If demand for the product is elastic, an increase in price would lead to a massive reduction in quantity demanded and consequently lowering of prices and revenue.

Shifts in demand curve are caused by other factors that affect demand except price. These include; income, price of related goods, tastes and preferences, expectations and number of buyers (Mankiw, 2011). Elasticity of supply shows the producers’ responsiveness to changes in price and is important in evaluating the impact of a shift in demand. For example, an increase in income would lead to an increase in demand depending on the type of the good thereby shifting the demand curve to the right. If it is an inferior good, an increase in income would lead to decrease in demand shifting the curve to the left. In this case, the good is normal. A shift in demand curve to the right would lead to an increase in price and quantity supplied. However, this is determined by elasticity of supply. If the good is elastic, a small increase in price would lead to a large increase in quantity supplied.

This would in effect lead to excess supply forcing the prices to fall thus inducing an increase in quantity demanded but if the supply is inelastic, an increase in price would lead to a small increase in quantity supplied not enough to offset costs hence fall in revenue. Provide two examples of increasing-cost industries in your state and propose why they would have a positively sloped supply curve. According to McEachern (2010) increasing-cost industries occur as a result of entry of new firms due to increase in demand. An increase in demand results in high production costs and the average long-run average cost curve of each firm to shift upwards. The market is competitive and thus new firms enter the industry to share in the abnormal profits made by existing firms.

However, as new firms enter, they compete thereby pushing up the production costs leading to low profit or some firms are forced out of the market. This depends on how far the market supply curve shifts to interact with demand curve. The industry would have a positively sloped supply curve as an indication of the increasing costs. Examples of increasing-cost industries are housing construction and mobile companies which bid up prices for labor and raw materials. Suggest how, under certain conditions, a perfectly competitive market is economically efficient.

A perfectly competitive market can’t innovate, because all products are homogeneous and can’t take advantage of cooperation. But if you define efficiency in a particularly useless way and choose only one definition of “economic efficiency” as well then there are certain conditions under which a perfectly competitive market is “economically efficient”.

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