Principles of Economics - Essay Example

At ceteris peribus, an increase in the prices of alcohol will cause a fall in the quantity demanded and consumed of a product (Becker, 2001). This would help mitigate the economic impacts of over consumption of alcohol. However, the economists must put into consideration the fact that the demand curve of alcohol is normally inelastic given the fact that it is addictive. They therefore have to realize that an increase in the tax level may lead to a small decline in the quantity of the product consumed.

The second option that can be pursued by an economist is moral persuasion. In this case, economists will prefer explaining the marginal cost and marginal benefits of consuming alcohol. In this case, the marginal cost will be higher than the marginal benefits hence economists will promote campaigns against the use of alcohol (Frank & Bernanke, 2007). They will therefore influence the enactment of legislation to bar teenagers from using alcohol; limit the number of drinking hours among other measures that reduce the consumption level.

When some drugs are prescribed for use, they will influence the demand and supply of other products. For instance, the demand for products used in the manufacture of a drug will increase if the quantity of the drug prescribed has been increased. . The elasticity of the two curves will determine the effectiveness of the policies formulated to regulate the performance of the economy. A shift in the supply curve will lead to a change in the new equilibrium point. If the demand curve were inelastic, a huge shift in the supply curve would result into relatively small changes in the equilibrium price (Boyes & Melvin, 2008).

Elasticity of the demand curve will therefore influence the economic impact of the shift in the supply curve. For instance, a shift in the supply curve would only result in an increase in the equilibrium price if the demand curve were perfectly inelastic. Policymakers will therefore determine the effectiveness of their decisions when considering the steepness of the demand curve (Frank & Bernanke, 2007). Similarly, the elasticity of the supply curve will influence the net effect of a shift in the demand curve.

Where the supply is inelastic, a shift in the demand curve will cause little or no change in the equilibrium quantity because even with an increased demand, suppliers will not be able to expand the quantities supplied. Prices will therefore increase but the quantity supplied will remain relatively constant. The elasticity of either the demand and supply curves are normally important when formulating policies aimed at influencing economic performance i.e. the government can increase the taxes imposed on goods with inelastic demand because this would not significantly affect the amount of the good consumed (Becker, 2001).

For an increasing cost industry, entry of a new firm will result in an increase in the unit cost of production. When a firm enters the market, it will cause the prices of the resources used in