Price Elasticity Of Demand In The Cigarette Industry Economics Essay

Introduction

Microeconomicss means the survey of the behavior of single economic units. It surveies the supply and demand in markets for peculiar goods and services and the resources, by analyzing the economic behavior of houses and consumers.

A coffin nail is a little paper-wrapped cylinder of healed and shredded or cut baccy foliages processed with 100s of chemicals. The coffin nail is ignited at one terminal and allowed to smolder for the intent of inspiration of its fume from filtered terminal, inserted in oral cavity. They are manufactured by a machine, and are the prevailing signifier of baccy used worldwide.

In Malaysia, coffin nail smoke is the utmost evitable cause of disease and prematurely decease in our state. Secondhand smoking causes frequent lung malignant neoplastic disease deceases yearly. Measures have been taken in both workplaces and public topographic points to restrict exposure to secondhand fume. Smokers around our state are likely experiencing a great trade of angst. A battalion of 20s will be priced at rm10 get downing today ( THE STAR, 2010 ) . The old monetary value at 2009 was RM9.30, and now priced 70cents higher than old. A monetary value addition is a good chance for tobacco users to kick the wont, adding that the ministry has set up clinics to assist tobacco users discontinue free of charge ( Health Minister Datuk Seri Liow Tiong Lai, 2010 ) . Locally, there are estimated to be more than 100 types of bootleg coffin nails, priced between RM3 and RM3.50 for a 20-stick battalion. He besides suggested that coffin nail smuggling activities might see an addition.

Malaysia authorities had realized that the ingestion of coffin nail in the state was so high and the authorities had decided to increase 10 % revenue enhancement on the baccy. This will straight impact the monetary value of baccy, which will take to the addition on monetary value for coffin nail. Harmonizing to the information from the given article, an addition of 10 % on baccy will cut down 3.8 % of consumers demand on coffin nail. Besides that, the authorities had besides ordered that it is a limitation for any publicity made on coffin nail and there is an age bound for buying coffin nail. The authorities used all these methods by trusting to further cut down the ingestion of coffin nail in Malaysia.

MAIN BODY

Explain monetary value snap of demand. Calculate the monetary value snap o demand for coffin nail and utilize a diagram to exemplify your reply.

Price snap of demand is a step of the reactivity of measure demanded to a alteration in monetary value. In other words, it is ration between a alteration in monetary value and the attendant alteration in measure demanded. There are two method used to cipher the grade of snap.

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

Ed = Q & A ; divide ; P

Q P

The 2nd method is The Arc Method. In other words, The Mid-point Method. The expression for The Arc Method is:

Ed = Q & A ; divide ; P

Q1 + Q2 P1 + P2

2 2

Diagram 1

The market demand curve for coffin nail will ever be inelastic. This is because smoke is an dependence and the tobacco users need to buy coffin nail to smoke and command the dependence. Therefore, when there is an addition in the monetary value of coffin nail, there will merely be a little lessening in the measure demanded. As shown in Diagram 1, there is an addition of 10 % in the monetary value of coffin nail and this 10 % addition in monetary value had lead to a lessening of 3.8 % in the measure demanded for coffin nail.

By utilizing The Point Method to cipher the grade of snap:

Ed = Q & A ; divide ; P

Q P

= 3.8 % & A ; divide ; 10 %

= 0.38

Therefore, 1 % addition in the monetary value of coffin nail will take to a lessening of 0.38 % of the measure demanded for coffin nail. Harmonizing to this consequence, the snap coefficient is less than 1, which means it is an inelastic demand.

What would be the consequence of puting the minimal retail monetary value of a stick of coffin nail?

By puting the minimal retail monetary value will make a monetary value floor in the market. Price floor is set to forestall the monetary value from falling below a certain degree. When a monetary value floor is set, Sellerss are allowed to sell at monetary values above that monetary value degree but non below it. This may be done to protect manufacturer ‘s incomes.

Diagram 2

The consequence of puting the minimal retail monetary value is excess occurs in the market of coffin nail. Quantity supplied will be at Q2 and measure demanded will be at Q1. This means that measure supplied of coffin nail is greater than measure demanded of coffin nail.

Diagram 3

When there is excess, authorities may deter supply by enforcing revenue enhancement on coffin nails. This means that authorities influence the production of coffin nails doing the supply curve in the market of coffin nail to switch to the left until the equilibrium point reached at E2 where the monetary value of each battalion of 20 coffin nails is RM10 and both measure demanded and measure supplied are at Q1.

Explain why authorities needs to increase the monetary value for coffin nails?

Government needs to increase the monetary value for coffin nails because of several grounds. The first ground is to protect kids and adolescents from taking up the smoke wont and exposing themselves to chronic diseases or taking drugs. This is because by increasing the monetary value for coffin nails, people without working income such as kids and adolescents will non be willing to utilize their pocket money to purchase coffin nails.

The 2nd ground is to diminish the decease rate cause by smoking worldwide. Around 5.4 million deceases a twelvemonth are caused by baccy and World Health Organisation ( WHO ) estimate that baccy usage will kill 1 billion people in the twenty-first century if current smoke tendencies continue. Therefore by increasing the monetary value for coffin nails, demand for coffin nails will finally diminish and most tobacco users will seek to kick the wont.

The 3rd ground is smoking can destroy the state ‘s repute and the image of the citizens. This is because when aliens come to go and detect that the state is full with tobacco users, they will finally take non to travel to that state for going. It straight affect the state touristry industry and economic of that state. Therefore by increasing the monetary value for coffin nails, demand for coffin nails will diminish and most tobacco users will seek to kick the wont. Finally, the state will hold lesser tobacco users.

The last ground is to make a healthy hereafter for the following coevalss. Children ever treat their parents as their function theoretical account or larning theoretical account. If parents have the wont of smoke, kids might follow and seek to smoke when they grown up. With the addition of monetary value for coffin nails, parents will diminish the smoke sum and finally discontinue smoke. Therefore, kids will slowly larn that smoke is non a good thing to larn.

Suppose that the monetary value of a package of 20s ‘ coffin nail is RM Pe in the market. Now consider a determination by the federal authorities to enforce a coffin nail revenue enhancement of RM t per package. Who will bear more of the revenue enhancement – Sellerss or purchasers? Illustrate your reply with diagrams.

Government may enforce direct revenue enhancement or indirect revenue enhancements. Direct revenue enhancements are revenue enhancements paid by single or administration such as personal income revenue enhancement and corporate revenue enhancement. Meanwhile, indirect revenue enhancements are revenue enhancements on outgo such as revenue enhancements on goods and services. When federal authorities enforce revenue enhancement to the coffin nails, 2 state of affairss will happen.

Diagram 4

The first state of affairs is the market supply curve for coffin nail is elastic. When revenue enhancement is imposed into the market of coffin nails, the supply curve will switch to the left doing the equilibrium point alteration from A to B, the equilibrium measure demanded alteration from Qe to Q1, and the equilibrium monetary value alteration from Pe to P1. Therefore consumer revenue enhancement is at P1BCPe and manufacturer revenue enhancement is at PeCDP2. In this state of affairs, consumer revenue enhancement is greater than manufacturer revenue enhancement. In other word, the consumer pays more revenue enhancements than the manufacturer.

Diagram 5

The 2nd state of affairs is the market supply curve for coffin nail is inelastic. When revenue enhancement is imposed into the market of coffin nails, the supply curve will switch to the left doing the equilibrium point alteration from A to B, the equilibrium measure demanded alteration from Qe to Q1, and the equilibrium monetary value alteration from Pe to P1. Therefore consumer revenue enhancement is at P1BCPe and manufacturer revenue enhancement is at PeCDP2. In this state of affairs, manufacturer revenue enhancement is greater than consumer revenue enhancement. In other word, the manufacturer pays more revenue enhancement than the consumer.

State another illustration of authorities intercession and analyze the effects of such intercession to the market.

Another intercession the authorities can make to the market of coffin nail is puting maximal retail monetary value of a stick of coffin nail. By puting maximal retail monetary value will make a monetary value ceiling in the market. Price ceiling is set to forestall the monetary value from lifting above a certain degree. When a monetary value ceiling is set, Sellerss are allowed to bear down any monetary value up to that monetary value degree but non permitted to travel above it. This is usually done for ground of equity.

Diagram 6

The consequence of puting the maximal retail monetary value is shortage occurs in the market of coffin nail. Quantity supplied will be at Q1 and measure demanded will be at Q2. This means that measure demanded of coffin nail is greater than measure supplied of coffin nail.

Diagram 7

When there is deficit, authorities may promote supply by giving subsidies or revenue enhancement alleviation to manufacturers. This means that authorities influence the production of coffin nails doing the supply curve in the market of coffin nail to switch to the right until the equilibrium point reached at E2 where the monetary value of each battalion of 20 coffin nails is at Pmax and both measure demanded and measure supplied are at Q2.

Decision

As the decision, we will be speaking about the inquiries in the Main Body. In inquiry 1, we explained the monetary value snap of demand. Then we calculate the monetary value snap for coffin nail and besides the snap coefficient for coffin nail. We had besides included a diagram to exemplify our replies.

Meanwhile in inquiry 2, we explained the definition of monetary value floor. Then we explained the consequence of monetary value floor and besides the manner to get the better of this job. We had used 2 diagrams to exemplify our replies.

In inquiry 3, we explained about the ground why authorities needs to increase the monetary value for coffin nail. We explained four grounds ; two of those are about wellness, one about touristry and the last is about future coevalss.

Furthermore in inquiry 4, we explained the consequence when authorities enforce revenue enhancement into the market of coffin nail. We explained the consequence in two state of affairss. The first state of affairs is where the supply curve for coffin nails is elastic and the 2nd state of affairs is where the supply curve for coffin nails is inelastic. We had used 2 diagrams to exemplify both state of affairss.

Last in inquiry 5, we explained another illustration of authorities intercession. The intercession is that authorities set maximal monetary value in the market of coffin nail. We explained the definition of monetary value ceiling. Then we explained the consequence of monetary value floor and besides the manner to get the better of this job. We had used 2 diagrams to exemplify our replies.