Elasticity - Essay Example

Download file to see previous pages... An equilibrium point of quantity is obtained when the two demand curves are drawn on a single graph. The inelastic demand for the veteran smoker clearly conforms to demand rule; when the price for cigarettes goes up, demand falls and vice versa. (See fig (3) on scanned document)
The government always increases the value added tax on cigarettes in order to reduce demand and also contain incidence of increased lung cancer due to smoking. Looking at fig (4) where the current equilibrium price is at three dollars and the quantity demanded is. When the price increases to six dollars, the supply curve  shifts upwards and moves to left to create a new supply curve. This shift and movement show how the markets, specifically suppliers, are reacting to the positive change in price. The quantity demanded by the veteran smoker and the new smoker proportionately reduces. (See fig (5)).
The consumer that evidently changes there smoking behavior drastically is the new smoker. As per figure five, when the price rises to six dollars, the shift in supply curve form  to causes the quantity of cigarettes demanded by the veteran smoker to reduce from  as the supply curve moves upwards along the  curve.
On the other hand for the new smoker, the shift in supply curve form  to causes the quantity of cigarettes demanded to reduce from. Since, , it is justifiable to say that the new smoker reduces his or a rate of consumption as a result of increase in cigarette price. One can also say due to the fact that the veteran smoker is used to smoking a given number of cigarette packs, changing his or her norm due to price changes will considerably be negligible.
The burden of increased price, in most cases is transferred to the consumer in form of value added tax. Increased tax, will usually lead to increase in the cost of raw materials and in turn the producers and suppliers will want to transfer this cost to consumers in form of value added ...Download file to see next pagesRead More