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 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.
1b) List the factors that affect supply and how that would affect the market of
cigarettes(use diagrams to explain your answer). (5 marks)
2. What is price elasticity of demand? Why is it so important in economics? (5marks)
Price elasticity of demand is the ratio of the percentage change in the quantity demanded of a product to a percentage change in its price. Price elasticity of demand is very important in economics because it ensures the suppliers to know the change of quantity demanded when there is an adjustment in price. By using price elasticity of demand, producers able to set up the price and also target markets for their goods and services. Therefore, they will not face any trouble in this.
3a) According to the article, what factors influence price elasticity of demand for
cigarettes? (15 marks)
According to the article, one of the factors which influence price elasticity of demand for cigarettes is gender. Women are more responsive to the price changing. Besides, education also influences price elasticity of demand for cigarettes. Less educated adults are more responsive to price changes than better-educated adults. Individuals with less than a high school education were estimated to have a long run price elasticity of demand of 0.60. However, individuals with more years of education were found to be ...
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3a) According to the article, what factors influence price elasticity of demand for
cigarettes? (15 marks)
According to the article, one of the factors which influence price elasticity of demand for cigarettes is gender. Women are more responsive to the price changing. Besides, education also influences price elasticity of demand for cigarettes. Less educated adults are more responsive to price changes than better-educated adults. Individuals with less than a high school education were estimated to have a long run price elasticity of demand of 0.60. However, individuals with more years of education were found to be unresponsive to changes in price. Furthermore, the income has also influence price elasticity of demand for cigarettes. High-income individuals usually are those who are better-educated and they do not responsive to the price changes. This could be because high-income individuals have extra money to buy the cigarette no mater how expensive it is. Therefore, it is contended that higher education has strong negative effects on smoking. Another factor is age. The younger generation is more responsive to the changes of the price. From the article, we know that 15-29 years teenagers have the price elasticity of 0.83. This is very high price elasticity. Last of all, another dominant factor is time. In long-run price elasticity of demand is almost twice as large as the short-run price elasticity. It is because people need time to change the smoking habit.
3b) What other factors (not mentioned in the article) may also influenced the price elasticity of demand for cigarettes? (5 marks)
One of the factors may also influence the price elasticity of demand for cigarettes are amount of income. This will change the demand elasticity refers to the total a person can spend on the cigarettes. If a pack of cigarettes goes up from RM1.00 to RM1.50 and income stays the same, RM3.00 which is the income that available to spend on a pack of cigarettes. Then now, it is only enough for two rather than three packs of cigarettes. The amount of income available to spend on the cigarettes has no change but there is an increase in price. This means that there is an elastic reaction in demand. Another factor may also influence the price elasticity of demand for cigarettes are time. The change in price will not influence the quantity of demanded. For example, if the price of cigarettes goes up RM3 per pack, a smoker with very few available substitutes will most probably keep on buying cigarettes. In long-run price elasticity of demand is almost twice as large as the short-run price elasticity.
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. This indicates that the amount of cigarettes consumption is decreasing from time to time. For instance, the increase in price of cigarettes for the first few months might not affect the numbers of quantity demanded that much. This is because smokers at first might not concentrate on the impacts of changes in the cigarettes' prices. Besides, smokers also find it tough to reduce the amount of consumption that sudden as smoking is addictive. However, the number of cigarettes consumption is reducing as time passed because smokers will find ways to cut down the amount of smoking. Due to price rise on cigarettes, smokers might think of reducing smoking as high expenses on cigarettes may cause them suffering from financial problem. Some smokers especially for low-income individuals even will give up smoking completely as they could not afford on the spending of smoking for any longer. Besides, the government's effort on banning smoking throughout the country also helps on reducing the numbers of smokers as the public are more exposed to the effects of smoking. Moreover, the government also imposed 'No Smoking' campaign among the students as this helps to avoid young generations being addicted on smoking. In this way, the number of smokers will drop as time passed and therefore reduced the amounts of quantity demanded.
5. Define positive and negative externalities. Give one example each. (10 marks)
Positive externalities are defined as the costs or benefits imposed on people other than the consumers and producers of the goods or services. In this case, the example for positive externality would be the increase in government's income. The raise of taxation benefits the government as it could get uses the money on other aspects. For examples, the government improved the budgets for facilities where citizens able to enjoy the conveniences provided by the government. On the other hand, negatives externalities would be the disadvantages or detrimental imposed on third parties rather than the consumers or producers. For instance, the negative externalities in this case would be pollution. Smoking causes air pollution and the government has spent a lot on reducing the pollution. Apart from that, second hand smoke might affect the health of non-smokers. The numbers of lung cancer patients has been increasing from time to time and one of the main factors is because of the inhalation of second hand smoke.
6. What are the measures taken by governments to reduce negative externality from smoking? (5 marks)
The measures taken by governments to reduce negative externality from smoking are restricting smoking in restaurants. This is because when you smoke in a restaurant it will affect others who are having their meal. We must remember not everyone is a smoker. Those who do not smoke may recent smoke from the cigarettes. Other than restricting smoking in restaurants some government have banned smoking in public places such as railway stations and in public transportation. Many members of the public will be affected, especially in air-conditioned places. Smoking is also prohibited in all flights, because passengers are confirmed to a limited air-conditioned space. Smoking can cause cancer. The people who inhale second hand smoke will suffer more than the smokers themselves. Meanwhile, governments such as Great Britain impose an extra tax on high tar and high nicotine cigarettes so that not everyone can afford to buy cigarettes especially teenagers. Furthermore, governments such as the government of United States have mandated health warnings on tobacco advertising to remind the public about the harmful effects of cigarettes on health. 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.