Principles of Economics Microeconomics

Question: Discuss about the Principles of Economics for Microeconomics Answer: Introduction: 1. Raising a tax on the alcohol is one of the best ways to discourage the consumption of such goods. In fact, a large pool of economists have been investigating on the impact of the alcohol prices on the consumption, drinking habit as well as various other wide range of issues caused by alcohol use and abuse. Such researches do confirm the hypothesis of the law of the demand that with the increase in prices, the demand for alcohol consumption does decreases. The conceptual framework of these studies were based on the idea that higher alcohol taxes lead to lesser drinking problems which results in reduction of the alcoholic abuse (Bonnie, O'Connell, 2004). The below graphs explains this argument, from both buyers and suppliers side. Prior to the tax, DD is the demand curve, SS is the supply curve, the initial equilibrium price and quantity are P1 and Q1 respectively. Suppose, a tax t1 is imposed on the alcohol. The new price a buyer would have to pay now is P1+t1. This leads to the decrease in the demand for the alcoholic beverages from D to D1, thereby creating a surplus for the producer by QQ2 quantity. Hence, we see that with the imposition of the price, the price paid by the buyers increases ( P1 to P1 +t1) ,given buyers purchases less goods at higher prices; and the price received by the sellers decreases (from P1 to P2), given that the sellers would provide lesser quantity at low price and vice versa. Hence, the overall quantity of the alcoholic beverages sold in the market is reduced. Since the incidence or burden of the tax are borne both by sellers and buyers, both would be less motived to purchase or sell goods (here, alcoholic beverages) (Mankiw, 2004; Pindyck Rubinfeld, 2005). The magnitude of the tax borne by either party depends on the degree of price elasticity of the alcoholic beverages. Many empirical studies show that the elasticity of the alcoholic beverages ranges from -0.15 to -0.58. All these researches positively agrees that the impact of the high alcohol price on consumption is very high (Bonnie O'Connell, 2004; Garrett Leatherman, 2016). Thus, as an Economist to the Department of Health and Federal government, it is highly recommended, based on the existing vast literature, to raise alcoholic price which would directly as well as indirectly look after the alcoholic abuse happens in our society. 2. The theory of absolute advantage and comparative advantage is broadly subjected to the production of a commodity the country has been utilizing its resources for. Every country has a different topography and is usually highly efficient in the production of few goods and less effective in others. This difference in the capability of a country engaged in the efficient production of the commodity forms the basis of the absolute advantage theory. For example, if India and China have expertise (that is, ability to produce at a lower cost) in the production of mobile phones, but India has the ample resources to produce a better quality of phones, then it is believed that India has an absolute advantage in the mobile Industry. Here, India specializes in the production of the mobile phones as its level and quality of resources are best suited for. Thus, the theory of absolute advantage is based on the concept of specialization (Bhagwati, 1996). Given that these resources are scarce, a country specializes in the production of the only commodity where it knows that they have a comparative advantage. Comparative advantage is based on the concept of opportunity cost where a second best alternative for a good is given up for choosing this particular good. Country/ Product Wine Wheat Opportunity Cost for Wine Opportunity Cost for Wheat United Kingdom 20 10 10/20= 0.5 20/10= 2 United States 60 40 40/60= 0.66 60/40= 1.5 It is obvious that United States (US) has an absolute advantage in the production of both goods, Wine and Wheat, but its opportunity cost is 0.66 for wine and 1.5 for wheat. For United Kingdom (UK), the opportunity cost is lower for wine and hence, it is feasible that it would specialize in the production of wine. Whereas, US, having absolute advantage in both goods have a comparative advantage in the production of wheat. Therefore, US would specialize in the production of wheat (Salvatore, 2004). To sum it up, absolute advantage tells us about the ability of the country to produce goods by using less inputs based on the concept of specialization; whereas, comparative advantage theory tells us the ability of the country to produce with a lower opportunity cost, a concept on which this theory is based on(Salvatore, 2004). References Bhagwati, J. (1996). International trade. Cambridge, Mass.: MIT Press. Bonnie, R. O'Connell, M. (2004). The Effects of Price on Alcohol Use, Abuse, and Their Consequences. National Academies Press (US). Retrieved from https://www.ncbi.nlm.nih.gov/books/NBK37612/ Garrett, T. Leatherman, J. (2016). Chapter Three-Garrett and Leatherman. Rri.wvu.edu. Retrieved 5 August 2016, from https://www.rri.wvu.edu/webbook/garrett/chapterthree.htm Mankiw, N. (2004). Principles of economics. Mason, Ohio: Thomson/South-Western. Pindyck, R. Rubinfeld, D. (2005). Microeconomics. Upper Saddle River, N.J.: Pearson Prentice Hall. Salvatore, D. (2004). International economics. New York: J. Wiley