Economics for Methodology of a New Microeconomics

Discuss about the Economics for Methodology of a New Microeconomics .

Introduction:

In Economics, the basic fundamental law involves the product price being linked to the demand for the product.  Accordingly, when there is a rise in the alcohol price due to the taxation it is expected there will be lower consumption of alcohol.  The action by the minister will help in achieving fruitful results for the society. Studies have proven increase in the price of alcohol has influenced consumption of alcohol among youths and reduced drunken driving (Baumol and Blinder 2015).  In the following illustration, a vivid graphical representation is made for a clear understanding of the scenario.

Analysis:

The manner in which price rises, affects the behavior of drinking is a complicated issue. In order to comprehend the effect of a rise in the price of alcohol there is a need to understand the way the demand is influenced by the price. Theoretical studies have shown that there exists an inverse relationship of per capita consumption and taxation. The alcohol demand is quite price sensitive up to a certain limit. There is limited evidence available that there is also a direct correlation. For the chronic problem drinkers it is seen their abusive behaviour would not be diminished as that of the responsible consumers. The moderate drinkers feel the Price sensitivity. With the price rise there is a tendency for the heaviest drinkers to shift the demand to cheap alternative form of the same product category (Nicholson and Snyder 2014).  A fall in the affordability, the drinking in bars would be move to drinking at home.  Alcohol price tends to affect the young people than that of the adults. Alcohol tax is an effective tool, which help in reducing the harm across all the age group (Boland 2014).  The health department and federal government should be enlightened about the issue and see how the effect of taxes on alcohol will reduce violence, alcohol impaired driving and death from liver cirrhosis. In an overall sense, price rise would lower the consumption of alcohol.

The government usually applies the indirect tax policies to curb harmful product consumption.  Indirect taxes are the taxes that the government imposes on the services and goods. The graphical representation will show the impact of a specific tax on alcohol, the incidence of taxation and effect on price elasticity of demand.

Suppose the government imposes specific unit tax on alcohol then there will be a shift in the supply curve as per the tax amount. Thus, there will be a parallel shift.

Figure: Specific Tax on Alcohol

(Source: Varian 2014)

When there is an extra tax of 1-dollar for each bottle of alcohol, the incidence of the burden is on the alcohol drinker. Since there are a number of sellers in the local market  the retailers they fear from lost sales so they increase by 0.50 dollars  and the balance is paid to government  The sellers has to pay 0.50 dollars to government and drinkers  are worse off as price increases by 0.50. Both sellers and buyers are worse off.

The burden is generally split between the consumers and the producers. The extent of the burden that is carried by producer or consumer is tax that is passed to consumers in relation to high prices. The incidence on the consumer is shown by the rise in price from $5 to $5.50. The quantity sold is Q1. The tax per unit is represented by the vertical distance, which is higher that of distance in between $5.5 and $4.5 time of Q1, which is represents the producer’s burden. The division depends upon the reaction of consumer to price rise.

Conclusion:

Thus, with the imposition of the taxes by the government will be affecting the consumption of alcohol as the taxes will raise the price and consumers will have to pay more.  This would be an effective step by government to prevent alcohol related disease and most commonly rash driving through alcohol consumption. However, exceptions related to alcohol consumption like an avid drinker moving to cheaper alternative exit but the government to a greater degree through alcohol taxation can control the situation.

2: Introduction:

The two important concept of international trade involves the comparative advantage and the absolute advantage theory.  These theories help in defining as to why the nations are trying to devote limited amount of resources for the production of commodities. The global economy is quite complex so economics of food production is a direct illustration of the mentioned trade theories. In this section, we will distinguish between the comparative advantage and the absolute advantage theory.

Analysis:

Absolute Advantage:

Adam Smith described the principle of absolute advantage in the  book ‘The Wealth of Nations’  mentioning that  absolute advantage as advantage of producing goods and services  by  greater amount by a nation  than that of the competitors through the utilization of same quantity of resource (Schumacher 2012). The theory can be explained through the following way.

Suppose there is a trade between two countries England and France and both countries are engaged in the production wine and cloth. The following table shows the hours of work devoted in the production in each country.

Country	Cloth	Wine
England	80	100
France	120	90

Table:  Working hours for producing Wine and Cloth for each country

(Source: Created by Author)

For England, it is seen that 80 hours of labor is required for the production of one unit of cloth, which is fewer hours than that of France. Similarly, for the production of wine 100 hours of labor is required for one unit but France requires only 90 hours for the production of one unit of wine. Thus, England has absolute advantage in the production of cloth while France has in the wine production. When the countries they specialize in the subject that they have absolute advantage in  then both countries  produces more of each of the product than in the absence of trade. With no trade, the countries produce one unit of wine and one unit of cloth. If England allots 180 hours of labor in the production of clothes then it will have absolute advantage and would be producing (80+100)/80 = 2.25 units of cloth. Similarly, if 110 hours of labor were put in the production of wine in France it would help in producing 2.33 units of wine. Thus through trade both would be enjoying more of commodities. The following figure shows hours of work devoted after specialization.

Country	Cloth	Wine
England	80+100	0
France	0	90+120

Figure:  Working hours for producing Wine and Cloth for each countryafter specialization

(Source: Created by Author)

Comparative Advantage:

David Ricardo developed the comparative advantage theory in the year 1817. The term comparative advantage is defined as the ability of a party to produce a good at lower opportunity cost than the other (Cuñat and Melitz 2012). However, there might be absolute advantage of producing all the type of goods, there is a possibility to the comparative advantage tends to differ.  When there is comparative advantage for a country then both the countries are going to be benefitted as goods are received a lower than that of the opportunity cost of producing (Levchenko and Zhang 2016).  The comparative advantage is explained through the following table:

Country	Cloth	Wine
England	100	120
France	90	80

Figure:  Working hours for producing Wine and Cloth for each country

(Source: Created by Author)

During autarky, England commits 220 hours in production of cloth and France devotes 170 hours of labour in producing wine. When the countries they specialize in the good they have, comparative advantage then England would be trading a unit of cloth for 5/6 to 9/8 unit of wine from France (Feenstra 2015). The countries then they are able to consume at least a unit of wine and cloth. Thus, more of each good is enjoyed by both the countries.

Conclusion:

Both the theories are equally important but it is to be noted that comparative advantage is the basic determinant to understand what the country will be specializing upon. The opportunity costs of the product are calculated for each of the goods by each country before trade. The country then will be producing that product where the opportunity cost of the product is the lowest.

Reference list:

Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.

Boland, L.A., 2014. Methodology for a New Microeconomics (Routledge Revivals): The Critical Foundations. Routledge.

Cuñat, A. and Melitz, M.J., 2012. Volatility, labor market flexibility, and the pattern of comparative advantage. Journal of the European Economic Association, 10(2), pp.225-254.

Feenstra, R.C., 2015. Advanced international trade: theory and evidence. Princeton university press.

Levchenko, A.A. and Zhang, J., 2016. The evolution of comparative advantage: Measurement and welfare implications. Journal of Monetary Economics, 78, pp.96-111.

Nicholson, W. and Snyder, C.M., 2014. Intermediate microeconomics and its application. Nelson Education.

Schumacher, R., 2012. Adam Smith’s theory of absolute advantage and the use of doxography in the history of economics. Erasmus Journal for Philosophy and Economics, 5(2), pp.54-80.

Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.