When discussing the effect of a product and economics it comes down to the basic which is cost versus demand. So when asked how does economics would approach the problem of alcohol abuse we would assume with the increase in the price of alcohol through taxes increase there would be a drop in alcohol consumption. It has not been all conclusive fact that increasing price will deter consumption. The demand has nothing to do with the price when addiction is the front runner. In many case of demand versus cost it would seem logical that as prices rises the demand for that product decreases. There have been numerous analyzes to see if increasing the price on a products deter the purchase by those addicted. Looking at alcohol abuse from an economist point view would require looking at the cost in damages which results in the misuse of alcohol. But before getting into cost and damages and results economist look at the assumptions to make things simpler, which mean finding out really matters the cost, damages or people health. Second we would look at isolating the variables, in the cased of alcohol abuse, we have two variable, alcohol and the effect of alcohol on people. Third element use is thinking at a margin which require economist to consider how a small change in one variable affects another variable and the impact. We can than go back and discuss the effect of raising alcohol prices and its effect on consumption by an alcoholic. The fourth element involves rational responds to incentives; it is an assumption that people will act in their own best interest. Which ask the question will people stop drinking because the price of alcohol rises? Most economists will attempt to answer with a discussion of cost versus demand versus supply.
When one discusses the theory of economics it starts with supply and demand. The basic principle regarding supply and demand is what drives our economy. We know that as supply increases the price tend to drop for that product and vice versa and as demand increases the price will increase or vice versa. But when discussing prescription drugs the effect could reach other products and services. Medical insurance is a service which is affected by supply and demand regarding prescription drugs. When the price of prescription drugs increase so do medical insurance rates also if there is a demand for a particular drug. The demand and price also affect the medical field in the way of contract between doctors and the maker of these drugs.
While supply and demand effect prices and in some case other services and products, it’s not all cut and dry. There is such a thing as elasticity of demand when talking economics. Elastic of demands looks closely at how a change in prices may or may not effect a change in demand. Example is the cost of a baseball glove is reduced by 10 percent there may not be a change in demand but a 30 percent reduction may show a change in demand. Then we must look at how much of a change occur as a result of the price change.
Knowing price elasticity of demand studies how the quantity demanded of goods and services is affected by price changes helps to understand how