Basic Principles of Economics, Essay Example

Question 1- Problem of alcohol abuse

While alcohol abuse may seem to be a personal problem, it is not. Alcohol abuse is a problem that affects the entire nation. According to the National Institute on Alcohol Abuse and Alcoholism (NIAAA), the annual societal cost of drinking is at around $9.5 billion. However, an economist would weigh the economic benefits associated with alcohol abuse as compared to the economic costs. On the positive view of things, there is an enormous contribution of licensed beverages to the state and national economies in form of tax revenues (Van 2004). Again, there are millions of jobs, with billions of people involved in the positive side of the ledger. From the economic point of view, federal taxes from drinks alone exceed the approximated real costs.

Two possible solutions to this problem

• Increase cost through added tax on alcohol
• Inducing regulations on alcohol abuse related cases, e.g. imposing large penalties on drinking and driving

Four elements of the economic way of thinking (Grootendorst & Stewart, 2006)

• Use Assumptions to Simplify- an economist would assume the negatives of alcohol abuse and focus on the positives of alcohol use. From this approach, things would be simpler, and the only issue would be improvisation of regularities.
• Isolate Variables-an economist would analyze the underlying problem strategically while involving variables as the costs and benefits as other variables held fixed.
• Think at the Margin ­ Economists would consider how a small change, say improvising a bun in alcohol use would affect the economy. They would also consider the impact such a decision would have on the affected individuals.
• Rational People Respond to Incentives –with this in mind, economists would find a way out that discourages alcohol abuse, while encouraging responsiveness consumption of alcohol with respect to their self-interests.

Question 2 – prescription drugs, and how they affect the demand and supply of other products and services in this country

Prescription drugs are necessities. Subjecting consumers to prescription drugs means they have to forego any other expenses to obtain the drugs. They are at a fix, and any other classes of goods formulate the substitute goods. Therefore, the subjection of prescriptions to consumers would have a major decrease in the demand for any other goods and services.  If the prescribed drugs have government subsidies, then their cost would be considerably lower, and thus this would accommodate the demand of  goods and services, and vice versa.

Question 3- Elasticity of demand and supply, and their impact on the shift in supply and demand respectively

Elasticity is the measure of sensitivity to price change. A little concern in price change results would mean small impacts on the willingness to buy or sell.  However, if people are very sensitive to prices, then large changes in the willingness to buy or sell observed.  The large changes in quantity will give us large elasticity.

The price elasticity of demand is the percentage change of the quantity demanded divided by the percentage change in price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price (Grootendorst & Stewart, 2006)

Illustration 1

Suppose there is a 10% increase in prices. The increase in prices causes consumers to cut off their willingness to buy by 12 %.  With this, the producers are willing to increase their quantity of supply by 6%. Thus the elasticity of demand is   12/10 = 1.2.

Illustration 2

In the 10% increase in prices, and the cutoff of 12% in the willingness to purchase by the consumers. Still taking that suppliers are willing to increase their quantity of supply by 6%, the elasticity of supply = 6/10 = 0.6.

If case, elasticity in demand or supply; if the elasticity numbers exceed one, then either the demand or supply is elastic.  If elasticity is less than one, then demand or supply is inelastic. If elasticity equals one, the demand or supply is unit elastic. In the above illustrations, the demand is elastic while the supply is inelastic (Contayannis, Hurley, Grootendorst, Jeon & Tamblyn 2005).

Question 4 – Increasing-cost industries in Virginia

The two increasing cost industries in Virginia include:

• The tobacco industry- political systems in Virginia have compromised the tobacco industry. The tobacco industry pays very little tax, and Virginia had the lowest cigarette tax in the nation from 1993-2004. Powerful Republicans support the tobacco industry, beating the powerless Democrats, who supportive of public health. I propose this as the leading factor of their positively sloped supply curve.
• The seafood industry- Virginia is a state rich in marine life thus offering the seafood industry with readily available raw materials. There is a 24-hour harvesting, processing and shipping of fish. Other than that, there is a ready market, both locally and internationally for the processed seafoods. I propose this as the underlying factor behind the positively sloped supply curve of the seafood industry.

Question 5 –Perfect competition

A perfectly competitive market occurs where there are many sellers, thus they are the price takers. Though it is not likely to exist in the real-world markets, a perfectly competitive market is the most economical efficient. A perfect market would constitute of many small firms, with each producing an insignificant percentage of the total market output. It thus has little or no control on ruling the market price. There are many individual buyers, thus none has control over the market price. In a perfect market, no cases of monopoly or monopsony power exist. Thus, under strict government conditions, a perfectly competitive market is economically efficient as all firms make normal profits in the end.

References

Grootendorst P.V. & Stewart D. (2006). A re-examination of the impact of reference pricing on anti-hypertensive drug plan expenditures in British Columbia. Health Economics. 15:735-742.

Contayannis P., Hurley J., Grootendorst P.V., Jeon S.H. & Tamblyn R. (2005). Estimating the price elasticity of expenditure for prescription drugs in the presence of non-linear price schedules: an illustration from Quebec, Canada: Health Economics. Vol 14(9):909-923.

Van Vliet R.C. (2004). Deductibles and health care expenditures: empirical estimates of price sensitivity based on administrative data. Int J Health Care Finance Econ. Vol 4(4):283-305.