Free «The Principles of Economics» Essay Sample

The principles of economics are all about choice and scarcity of commodities. Human beings are perceived to be rational thinkers and therefore they would always opt to buy products that would give them maximum satisfaction. According to Mankiw (2011), rational people purposefully and systematically do whatever they can to achieve the set objectives if they are presented with necessary opportunity. When human beings are provided with the chance to choose among alternatives and when the resources are scarce, they would evaluate the costs and benefits of consuming one more unit of a product. Therefore, one would only take a decision to settle for a community when its marginal benefits are more than the marginal cost. Therefore, when dealing with the problem of alcohol abuse, one has to consider its costs and benefits. It is too expensive to choose to abuse alcohol compared to its benefits. For instance, the money spent on buying alcohol could otherwise be used for more important things such as education for children, feeding the family or investment. Additionally, alcohol consumption can cause health problems such as lung cancer thus adding costs.

If all these issues are put into consideration, the two solutions an economist would settle for to address the problem of alcohol consumption are coase theorem and pigouvian regulations. Based on the coase theorem, an economist would suggest that the involved parties negotiate or bargain terms that are applicable and beneficial to both of them. However, for this to occur, the bargaining must not have any cost implications because any cost would affect the outcome. Therefore, this theory shows that in situations where property rights are involved, the parties at stake do not have to consider how the rights were issued as long as they can trade to come up with a mutually advantageous decision. The second option, Pigouvian regulation, involves taxation. This works in such a manner that an economist would increase the cost of alcohol by reducing the supply or availability of the product in the market. With an increase in demand and low supply, the price of alcohol will go up. Similarly, extra taxes can be included. For instance, anyone found driving while under the influence of alcohol could be taxed meaning that more money will be spent and the abusers would desist from taking alcohol.

Prescription Drugs

Prescription drugs affect products’ supply and demand in various ways. Lipsey & Harbury (1992) assert that the law of demand and supply is considered to be a key principle in running the economy. According to the law, when the supply of a product rises, its price is likely to drop and vice versa. Similarly, when the demand rises, it is likely to increase the price and vice versa. However, when the forces of supply and demand are equal, it results to equal equilibrium between price and quantity.

The demand for prescription drugs is likely to influence the demand for other commodities such as water and alcohol in a number of ways. For starters, people using prescription drugs need water to take the drugs. This implies that they will need to buy bottled water. Similarly, they could be influenced to take other drugs to quench their thirst of getting high. This would mean that they buy other substances such as alcohol. Additionally, prescription drugs can have adverse effects on people’s health. Therefore, they will need health insurance services to protect their lives. Therefore, high demand for the drugs will increase the demand for health insurance services. This will simultaneously increase the demand for pharmaceutical goods and services such as pain killers and health checkups.

Elasticity for Demand

According to Acocella (2005), incentives play a critical role in directing the shift in demand and supply. Therefore, rational people are induced to act by incentives or respond to them. Taxes can increase the price of a commodity like alcohol and this would make the abusers to desist or reduce their consumption. Additionally, tax incentives will increase the supply of a commodity into the market. However, the tax incidences will change depending on the elasticity of demand and supply. If the demand is inelastic, the consumer will pay higher taxes. On the other hand, the supplier will pay more taxes when the supply is inelastic because the percentage change in quantity is less than price the tax imposition. Therefore, imposition of tax will either shift demand or supply.

Two examples of industries with increasing costs are the textile industry and the oil and gas industries. The textile industry is labor intensive but unfortunately it faces shortage of man power. On the other hand, the oil and gas industry has stiff regulations concerning the environment. For instance, the oil companies have to ensure they cause minimal or no emission of green house gases into the atmosphere. If they do not adhere to these regulations, they have to pay heavy fines. Therefore, an increase in oil production will lead to an increase in the cost of production. Such factors lead to diseconomies of scale (Lipsey & Harbury, 1992).

Perfect Competition

This describes a market where no participants are big enough to control the market and set the price of a common product. Since there are very strict conditions for a perfect competition, very few or no perfect competitive markets exist (Acocella, 2005). However, such a market would be economically efficient because there is no single participant who can influence the price of a commodity. Therefore, any producer targeting profit-maximization works with a market price that is equivalent to the marginal cost and therefore there will be no excess costs and output because P=MC.


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