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Price Elasticity Of Demand In The Cigarette Industry

INTRODUCTION

Microeconomics means the study of the behavior of individual economic products. It studies the supply and demand in markets for particular goods and services and the resources, by examining the economic behavior of organizations and consumers.

A cigarette is a little paper-wrapped cylinder of healed and shredded or slice tobacco leaves prepared with hundreds of chemicals. The cigarette is ignited at one end and permitted to smoulder for the purpose of inhalation of its smoke cigarettes from filtered end, placed in mouth. They are manufactured by way of a machine, and are the predominant form of cigarette used worldwide.

In Malaysia, using tobacco is the extreme avoidable reason behind disease and untimely fatality in our nation. Secondhand smoking triggers frequent lung cancer tumor deaths annually. Methods have been taken in both workplaces and general public places to limit contact with secondhand smoke. Smokers around our country tend feeling a great deal of angst. A load up of 20s will cost at rm10 starting today (THE Legend, 2010). The prior price at 2009 was RM9. 30, and today priced 70cents higher than previous. A price increase is an excellent chance for smokers to kick the habit, adding that the ministry has set up clinics to help smokers give up cost-free (Health Minister Datuk Seri Liow Tiong Lai, 2010). Locally, there are approximated to be more than 100 types of smuggled smokes, listed between RM3 and RM3. 50 for a 20-stay load up. He also recommended that cigarette smuggling activities might see an increase.

Malaysia government experienced realized that the intake of cigarette in the country was so high and the federal government had made a decision to increase 10% tax on the cigarette. This will straight affect the price tag on tobacco, which will lead to the increase on price for cigarette. According to the information from the given article, an increase of 10% on cigarette will reduce 3. 8% of consumers demand on cigarette. Besides that, the government had also purchased that it's a restriction for just about any campaign made on cigarette and there is an get older limit for purchasing cigarette. The federal government used each one of these methods by expecting to further decrease the consumption of cigarette in Malaysia.

MAIN BODY

Explain price elasticity of demand. Estimate the price elasticity o demand for cigarette and use a diagram to illustrate your answer.

Price elasticity of demand is a measure of the responsiveness of quantity demanded to an alteration in price. In other words, it is ration between a change in price and the resultant change in number demanded. You will find two method used to assess the amount of elasticity.

The first method is The Point Method. The solution for The Point Method is:

Ed = Q · P

Q P

The second method may be the Arc Method. Quite simply, The Mid-point Method. The method for The Arc Method is:

Ed = Q · P

Q1 + Q2 P1 + P2

2 2

Diagram 1

The market demand curve for cigarette will be inelastic. It is because smoking is an habit and the smokers need to acquire cigarette to smoke cigars and control the addiction. Therefore, when there is an increase in the price tag on cigarette, there will only be a little decrease in the quantity demanded. As shown in Diagram 1, there can be an increase of 10% in the price tag on cigarette and this 10% upsurge in price had lead to a decrease of 3. 8% in the number demanded for cigarette.

By using THE IDEA Method to compute the amount of elasticity:

Ed = Q · P

Q P

= 3. 8% · 10%

= 0. 38

Therefore, 1% upsurge in the price of cigarette will lead to a loss of 0. 38% of the quantity demanded for cigarette. According to this effect, the elasticity coefficient is significantly less than 1, this means it can be an inelastic demand.

What would be the effect of setting the lowest retail price of any stick of cigarette?

By placing the lowest retail price will generate a price floor in the market. Price floor is set to prevent the price from slipping below a certain level. Whenever a price floor is set, sellers are permitted to sell at prices above that price level but not below it. This may be done to protect producer's earnings.

Diagram 2

The effect of setting the minimum retail price is surplus occurs on the market of cigarette. Amount supplied will be at Q2 and volume demanded will be at Q1. This means that quantity provided of cigarette is greater than quantity demanded of cigarette.

Diagram 3

When there exists surplus, federal government may discourage resource by imposing duty on cigarettes. This means that government effect the production of cigarettes causing the supply curve on the market of cigarette to shift left before equilibrium point reached at E2 where the price of each pack of 20 cigarette smoking is RM10 and both volume demanded and number supplied are at Q1.

Explain why government needs to raise the price for tobacco?

Government needs to boost the price for smokes because of several reasons. The first reason is to safeguard children and teens from taking up the smoking behavior and exposing themselves to persistent diseases or taking drugs. This is because by increasing the price for cigarette smoking, people without working income such as children and teenagers will never be willing to work with their pocket money to buy cigarettes.

The second reason is to diminish the death rate cause by smoking worldwide. Around 5. 4 million deaths yearly are brought on by tobacco and World Health Organisation (WHO) estimate that tobacco use will kill 1 billion people in the 21st century if current smoking tendencies continue. Therefore by increasing the price for tobacco, demand for smoking cigarettes will eventually reduce & most smokers will try to break the addiction.

The third reason is smoking can mess up the country's reputation and the image of the individuals. This is because when foreigners come to visit and discover that the united states is full with smokers, they'll eventually choose not to go compared to that country for exploring. It directly affect the country tourism industry and economical of that country. Therefore by increasing the price for smoking, demand for smoking cigarettes will decrease & most smokers will try to kick the habit. Eventually, the united states will have reduced smokers.

The last reason is to create a healthy future for the next decades. Children always treat their parents as their role model or learning model. If parents hold the behavior of smoking, children might follow and try to smoke cigarettes when they grown up. With the increase of price for cigarettes, parents will decrease the smoking amount and eventually quit smoking. Therefore, children will gradually learn that smoking is not a good thing to learn.

Suppose that the price tag on a packet of 20s' cigarette is RM Pe in the market. Now look at a decision by the government to impose a cigarette tax of RM t per packet. Who will carry more of the duty - retailers or clients? Illustrate your answer with diagrams.

Government may impose direct tax or indirect fees. Direct taxes are fees paid by specific or organisation such as personal tax and corporate duty. Meanwhile, indirect taxes are taxes on costs such as fees on goods and services. When federal government impose duty to the smokes, 2 situations will occurs.

Diagram 4

The first situation is the marketplace resource curve for cigarette is stretchy. When duty is imposed in to the market of cigarettes, the source curve will change left creating the equilibrium point change from A to B, the equilibrium quantity demanded change from Qe to Q1, and the equilibrium price change from Pe to P1. Therefore consumer tax is at P1BCPe and company tax reaches PeCDP2. In this situation, consumer taxes is higher than producer taxes. In other expression, the consumer pays off more fees than the producer.

Diagram 5

The second situation is the market supply curve for cigarette is inelastic. When duty is imposed in to the market of tobacco, the resource curve will move left creating the equilibrium point change from A to B, the equilibrium quantity demanded change from Qe to Q1, and the equilibrium price differ from Pe to P1. Therefore consumer tax is at P1BCPe and company tax is at PeCDP2. In this example, producer taxes is greater than consumer duty. In other term, the producer pays more duty than the consumer.

State another exemplory case of government treatment and analyse the effects of such intervention to the marketplace.

Another intervention the government can do to the marketplace of cigarette is arranging maximum retail price of your keep of cigarette. By establishing maximum retail price will generate a price roof on the market. Price ceiling is set to prevent the price from growing above a certain level. Whenever a price ceiling is defined, sellers are permitted to charge any price up compared to that price level however, not permitted to exceed it. That is normally done for reason of fairness.

Diagram 6

The aftereffect of setting the utmost retail price is lack occurs in the market of cigarette. Quantity provided will be at Q1 and volume demanded will be at Q2. Which means that amount demanded of cigarette is greater than quantity provided of cigarette.

Diagram 7

When there may be shortage, authorities may encourage source giving subsidies or duty relief to companies. This means that government influence the production of cigarettes creating the resource curve in the market of cigarette to shift to the until the equilibrium point reached at E2 where in fact the price of each pack of 20 cigarette smoking is at Pmax and both number demanded and volume supplied are at Q2.

CONCLUSION

As the final outcome, we will be discussing the questions in the Main Body. Involved 1, we described the price elasticity of demand. Then we assess the price elasticity for cigarette as well as the elasticity coefficient for cigarette. We'd also included a diagram to demonstrate our answers.

Meanwhile in question 2, we described the definition of price floor. Then we explained the result of price floor as well as the way to triumph over this problem. We'd used 2 diagrams to illustrate our answers.

In question 3, we explained about the key reason why government needs to boost the price for cigarette. We explained four reasons; two of those are about health, one about travel and leisure and the previous is about future generations.

Furthermore in question 4, we described the effect when federal government impose tax in to the market of cigarette. We explained the result in two situations. The first situation is where the source curve for smoking cigarettes is flexible and the next situation is where the source curve for smoking is inelastic. We'd used 2 diagrams to demonstrate both situations.

Lastly involved 5, we described another exemplory case of government treatment. The intervention is the fact government set maximum price in the market of cigarette. We described the definition of price roof. Then we described the effect of price floor as well as the way to beat this problem. We had used 2 diagrams to illustrate our answers.

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