Suggest how an economist would approach the problem of alcohol abuse. Provide two (2) possible solutions to this problem. Include the four (4) elements of the economic way of thinking in your analysis.
Economists classify every activity as either consumption or saving. Consumption means that the individual is depreciating investible capital while saving adds to the available capital for investment. Consumption is health to an economy only up to a given level, after which it deteriorates it. In this case, alcohol abuse is a consumption activity that has negative effect on economic growth. Based on this, an economist will handle this problem as depreciation of the economy.
An economist will assume that people abuse alcohol because it is cheap or because they are not involved in economic activities. The solution to this problem will therefore involve will be increasing the price of alcohol through taxation. Most victims of alcohol abuse are not economically well up. Ceteris Paribus, poverty is directly related to alcohol abuse. With this fact in mind, an increase in price of alcohol will make it unaffordable to many abusers. This will not have a great negative impact on government revenues due to decreased sales because it will be compensated by the increased tax rate. The other solution to the alcohol menace would be to provide the victims with incentives that will enable them engage in income generating activities. This will reduce their idle time thus lacking the need and time to abuse alcohol. In the end, this income will increase a country’s marginal productivity as well as the gross domestic product.
Analyze how prescription drugs affect the demand and supply of other products and services in this country.
Prescription drugs refer to those that are taken under a doctor’s description. This always results from a medical examination due to an ailment. The government may require that these drugs should not be taken without doctor’s prescription through legislation. This will have an effect on the demand and supply of product and services related to these drugs, for instance medical services and the inputs required to manufacture the drugs. Considering the effect on demand for Medicare, prescription medicine increases demand for health services. This is because the government requires that an individual be examined by professional medical personnel before consuming the drug.
The same prescription may have mixed effects to the products used in manufacturing. The consumers of the drug may decide to seek alternative drugs that will have similar or close effects to the one under prescription. In this case, prescription will result to a decline in the demand for these products and an increase in demand of the un-prescribed drugs. On the other hand, consumers may perceive the prescribed drug to be more effective than other drugs. This will increase the demand of inputs and reduce that of other related un-prescribed drugs.
Formulate a reason why the 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 a shift in demand. Include at least one (1) example in each scenario.
Elasticity of demand can be defined as a measure of the degree of responsiveness of demand of a commodity to its price. A shift in supply say to the right will mean increase in supply of a commodity resulting to a fall in price of the commodity. This will consequently increase the demand for the same product. A commodity with a high elasticity of demand will experience a more than proportionate increase in demand after an increase in supply. For instance, if coca cola has a high elasticity demand, increase in supply will cause a more than proportionate increase in demand.
Elasticity of supply refers to a measure of the degree of responsiveness of supply of a commodity to its price. We consider a shift in demand to the right. A shift in demand results from a change in price of other products other than its own price. If the demand shifts to the right, there will be a deficit in supply because of excess demand. This will consequently result to an increase in price of the commodity. If price elasticity of supply is high, the producers will increase the supply of the commodity by more than proportionate increase in demand. We take an example of the airline industry. If the supply of airline tickets is highly price elastic, a shift in demand to the right will cause an increase in supply by more than proportionate increase in demand.
Provide two (2) examples of increasing-cost industries in your state and propose why they would have a positively sloped supply curve.
An increasing cost industry is one whose production cost increases as the number of firms in those industries increases. Examples of such industries are the textile industry and the shoe industry. These two industries share the fact that they are labour intensive in nature. As the number of companies rises, the demand for labour increases creating deficit in labour supply. Consequently, the price of labour will increase because these firms have to pay more to attract laborers. One of the core objectives of a firm is profit generation. The companies will thus increase output prices to cover the increasing cost. High cost of a commodity attracts firms to produce more of it, and because of this, the supply function of increasing cost industries will always be positively sloped.
Suggest how, under certain conditions, a perfectly competitive market is economically efficient.
A perfectly competitive market is one where there are many buyers and sellers perfect information asymmetry and prices are determined by forces of demand and supply. Economic efficiency refers to the ability of an economy to achieve full employment. In a perfectly competitive market, there is large production to cover the demand. All firms are price takers and thus there is no exploitation. Firms produce and sell at price to cover only their production cost. These firms are more focused on cost reduction than increasing prices. For this reason, there is no wastage because all firms aim at making profits by producing efficiently. However, a perfect competition is an ideal market that will only be economically efficient under the conditions that, there are no transaction costs, no government intervention, and that all buyers and sellers have perfect information of the market.
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