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¶ … solutions for the alcohol abuse problem from economists' point-of-view. The second section of the paper addresses the situation of prescription drugs and how they can affect the demand and supply of other products and services. The paper continues with a section that explains the relationship between supply modification and elasticity of demand, and between demand modifications and elasticity of supply. There is also a section that discusses increasing-costs industries. Another section of the paper address the conditions required for competitive markets to be economically efficient.
There are several solutions that economists can offer when addressing the alcohol abuse problem. In this case, the problem is regarded as a negative externalities situation of the production and consumption of alcohol. The assumption in this case is that alcohol abuse is a negative externality because of its consequences, like drunk driving and the effects on consumers' health and on relationship with other individuals. The Coase theorem is one of the solutions that can be applied in this case. This means that the parties involved in the process and affected by alcohol abuse can negotiate compensatory benefits in accordance with their power of influence on decision makers and with the importance of consequences determined by this situation. The success of this solution also depends on the cost of negotiation. Another solution to this problem is represented by Pigouvian taxes and regulations. In this case, the level of established taxes must be similar to the value of the externality. Therefore, the variable that must be modified is represented by the taxes associated with alcoholic beverages. Regarding the marginal change, it is obvious that prices of alcohol...
As a response to such actions, individuals are likely to reduce consumption.
2. It has been observed that prescription drugs affect the demand and supply of other products and services. A higher demand of prescription drugs also determines an increased demand for doctors, pharmacists, and production facilities. This leads to increased demand for workforce in this field and to increased competition between producers, which determines smaller prices. In addition to this, an increased percentage of customers' income spent on prescription drugs leads to reduced demand for products and services like clothes, education, entertainment, and others. The increased prices of prescription drugs can determine reduced demand of these products. Furthermore, this can increase the demand for substitute products, like over-the-counter drugs.
3. The elasticity of demand is an important factor that must be analyzed in case of shifts in supply. In other words, it must be analyzed how demand is likely to modify in case supply increases or decreases. In case the supply increases the prices would normally reduce. In such cases, demand can also increase. In case the prices are not reduced, it is possible that demand will not increase. For example, if a larger number of cell phones is provided to customers, they could buy more cell phones if their prices reduce in comparison with previous price levels. In case supply reduces, this means prices increase, which leads to reduced demand.
The elasticity of supply is important when analyzing the impact of a shift in demand. This is because when demand for certain products and services increases, the supply must also increase in order to satisfy the excess demand (Adam, 2009). This can…
Reference list:
1. Adam, G. (2009). Economic Theory: Supply and Demand. Retrieved January 31, 2012 from http://www.science20.com/gerhard_adam/blog/economic_theory_%E2%80%93_supply_and_demand.
2. Perfect Competition (2011). Investopedia. Retrieved February 1, 2012 from http://www.investopedia.com/terms/p/perfectcompetition.asp.
3. Hall, R. & Lierberman, M. (2007). Economics: Principles and Applications. Cengage Learning. Retrieved February 1, 2012 from http://books.google.ro/books?id=whLWKYNy0UoC&pg=PA220&dq=perfect+competition&hl=ro#.
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