Macro and Micro Economics - Elasticity - Essay Example

The quantity demanded by the veteran smoker at the current price of three dollars a pack is. The veteran smoker consumes more cigarettes than the new smoker, which is why this is displayed in figure two (fig (2)) on the scanned graphs.

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 conforms to the demand rule; when the price of cigarettes goes up, demand falls and vice versa. (See fig (3) on scanned document)

Question Two
The government always increases the value-added tax on cigarettes to reduce demand and also contain the 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 the 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)).

Question Three
The consumer that changes their smoking behavior drastically is the new smoker. As per figure five, when the price rises to six dollars, the shift in the supply curve form to causes the number of cigarettes demanded by the veteran smoker to reduce as the supply curve moves upwards along the curve.
On the other hand for the new smoker, the shift in the supply curve form to causes the number of cigarettes demanded to reduce. Since it is justifiable to say that the new smoker reduces his or her rate of consumption as a result of an increase in cigarette price. One can also say because 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.

Question Four
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 an increase in the cost of raw materials, and turn, the producers and suppliers will want to transfer this cost to consumers in form of value-added tax. Looking at this example of cigarettes, the price movement to six dollars does not implicitly involve taxation on the cigarette pack. Read More