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MICROECONOMIC - Essay Example

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Microeconomics: Tax, Price and Cigarette Smoking Contents Contents 2 Answer 1 3 Answer 2 3 Answer 3 5 Answer 4 6 Question 5 8 Question 6 8 References 9 Answer 1 In the year 2008, when the taxes on cigarettes were increased by 62 cent per pack the sales of cigarettes decreased by 10%…
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MICROECONOMIC
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Download file to see previous pages For the person who smokes cigarettes, it is a good commodity. Hence, the Price Consumption curve would be downward sloping one as in the figure above. But the slope will be a flat one because although the price goes up, the consumption does not get reduced at the same rate. Answer 2 The difference between a young smoker and an adult smoker is that the former can reduce the level of smoking as it is not a habitual activity for him hence cigarettes will be treated as a normal good for him. So when the price of the cigarette increases the young consumer can reduce the consumption. Hence the demand curve would be an elastic one (Gottheil, 2013, p.101). On the other hand, for an adult smoker cigarette consumption would not vary with changes in the prices because it would be an addiction for him and hence even if the price is high he would not be able to reduce the consumption of cigarettes. The demand for cigarettes for an adult would be inelastic. In the above figure, the producers of cigarettes face a perfectly inelastic demand curve from the adult smokers but a relatively more elastic demand curve from the young smokers. Now if the price of Cigarette increases the adult smokers will continue to buy the amount Qa but the young ones would adjust their consumption as per the prices. Since the quantity demanded of cigarette decreases for the young smokers, the demand for other good increases. But this does not happen in case of the adult smokers. Whatever be the prices of the cigarettes, they will continue consumption of the same amount .Hence the demand for other goods will remain constant or increase marginally. The above graph applies for the young smokers whose demand fluctuates with the changes in the prices. The initial demand for cigarettes is Q1 and the price is P1. The initial demand curve for other goods was D1. Now due to increase in the prices, the new quantity demanded would be less amount i.e. Q2. Thus the demand for other goods increases to D2. This change does not happen for an adult smoker. He does not change the quantity and is ready to pay the price differential. Thus the demand curve for other goods remains constant. Answer 3 Though tobacco as an addictive consumption cannot be explained by the general economics laws of demand and supply, it has to be kept in mind that there are social costs as well as time costs associated with the continuous use of tobacco. Economic Research has provided evidence of the fact that the demand for cigarettes does decrease with an increase in the prices of cigarettes (McGowan, 1995, p.113). The income levels of the individual smoker also have an effect on the demand for cigarettes. Studies across the world has shown that the demand due to an increase in the prices of cigarettes have fluctuated more in the underdeveloped countries than in the developed countries. This proves that the people of these countries are more price sensitive than their developed counterparts. But addiction of cigarette happens irrespective of the level of income hence an increase in the tax rate may appear to be regressive because it may affect the poorer segment of the population. The consumption habits of the past also influence the consumption habits of the future. Hence the people who have a record of consuming cigarettes more in the past tend to consume even more in the future. Thus if anti ...Download file to see next pagesRead More
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