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Introduction

1. Governments are trying to influence the market of cigarettes so that people reduce smoking. a) List the strategies used to affect demand for cigarettes and how it would affect smoking(use diagrams to explain your answer). (15 marks) Governments are trying to affect demand for cigarettes by implying strategies to real action such as increasing the import duty, putting up advertisements against smoking and hosting campaigns and projects to curb smoking activities. In the graph, assume that the demand curve is static, on supply curve S0 and demand curve D0, the quantity demanded is 30 packs when the price of cigarettes per pack is RM 2. By increasing the import duty, putting up anti-smoking banners and hosting campaigns, the quantity of supply demanded by the sellers will decrease because they use the same amount of money in exchange for a lesser amount of cigarettes. From the graph, this particular action from them caused the supply curve to shift to the left from S0 to S1, with the quantity demanded decreased to 20 packs when the price of cigarettes per pack raise to RM 2.50. If the government runs tighter controls over cigarette imports, then the supply curve will shift to the left even more, that is from S1 to S2 with reference to the graph, with the quantity demanded is 10 packs when the price of cigarettes per pack is RM 3. With this the government hopes that with the increase of price in cigarettes while the quantity supplied in the market remains constant, ceteris paribus, the community will tend to attempt to give up smoking and thus causing a decrease in demand for cigarettes. ...read more.

Middle

4a) According to the article, what would be the price elasticity of demand for cigarettes in the short run and the long run? (5 marks) Based on the article given, a 10 percent permanent increase in the price per pack of cigarettes reduced the current consumption 4 percent in the short run. In this case, we can compute the price elasticity of demand in the short run as follows: ESR = Percentage change in quantity demanded Percentage change in price = 4% 10% = 0.4 (<1) The percentage change in quantity demanded is less than the percentage change in price. (ESR= 0.4) Therefore, the demanded curve is inelastic. On the other hand, the price elasticity of demand in the long run can be compute as below: ELR = Percentage change in quantity demanded Percentage change in price = 7.5% 10% =0.75 (<1) The percentage change in quantity demanded is less than the percentage change in price. (Elr = 0.75) Therefore, the demand curve is inelastic. From the calculation above, we can conclude that the short run price elasticity of demand would be 0.4 and increase to 0.75 in the long run where both of the figures are less than 1 and therefore are price inelastic. b) Why is the short run price elasticity of demand for cigarettes different from the long run? (10 marks) From the article given, the price elasticity of demand for cigarettes in the short run is 0.4 whereas the elasticity of demand increases to 0.75 in the long run. ...read more.

Conclusion

Other laws and legalities are also put in place by governments to ensure less people smoke, such as laws on billboards and graphics on cigarette boxes to discourage smoking. 7. There are two contradictory opinions about the effectiveness of tax. What is your stand on the issue? Explain. (10 marks) In my opinion, I totally agree with the government's effort on cutting out cigarettes by imposing high tax rates on cigarettes. From the economic point of view, an increase in cigarette's tax may lead to a rise on the price of cigarettes. In this way, numbers of buyers will decrease as consumers might find it expensive to purchase cigarettes. Besides, smokers especially youth and women will cut down their cigarettes consumption or might even quit smoking as most of them unable to bear the burden of tax. Thus, suppliers might also cut down the cigarettes supplies due to the reduction of consumers. On the other hand, the effectiveness of tax also eases the government's expenses on their effort of banning smoking. By imposing tax on cigarettes, the government could cut down the budgets on banning smoking. This helps the government save a lot of money because the government spent millions every year on reducing number of smokers. There are also opponents argued that the price increase in cigarettes would generate financial problems among the low-income. However, this could be solved as a raise of tax also directly increase the government's income. Thus, the government could use the money from taxation to develop financial aid or even other government financial program on low-income citizens. ...read more.

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