Principles of economics Essay Example | Topics and Well Written Essays - 750 words

Principles of economics - Essay Example Some of the alcoholic drinks are treated as ‘loss leaders’, the drinks whose prices are set below the cost of producing them. This is done to attract more customers. The setting of ‘floor price’ would ensure that a minimum price level is set for the alcoholic drinks and the retailers would be bound to set their prices not below the minimum price level. This is intended to increase price of those drinks in particular whose prices are below the minimum level. With the rise in price, the demand for the drinks is expected to fall thereby floor price setting would act as an effective measure to reduce alcohol abuse. The other contention about this issue is to put a limit on the availability of licenses to the retailers. The lesser the number of retailers, the lesser would be the availability of the alcoholic drinks. Shortage of the commodity would raise its price and people’s ability to purchase would fall (Hou, 2010). However, these solutions bring in other problems. For some binge drinkers alcoholic drinks are giffen goods for which there is less or no substitute. Hence due to a rise in price they would reduce consumption of other goods to maintain the consumption of alcohol at the previous level. Limited supplier of drinks would also bring a similar effect. For the normal drinkers alcohol is a normal good and increase in price of alcohol would impel them to reduce consumption of alcohol but at the same time reduce their purchasing power just as the case of price rise of any normal consumer good (Hou, 2010). Answer: Prescription drugs are normal goods and their quantity demanded increases with fall in price. It has positive income elasticity. Therefore, if the price of prescription drugs rises, the purchasing power of the consumers fall thereby reducing the demand for other goods and services. 3. Formulate a reason why the elasticity of demand is an important consideration when analyzing the impact of a shift in supply and why the