ASSIGNMENT 2 – Applied Writing Essay Example

8Applied Writing

Applied Writing

Question 1: How market equilibrium price and quantity for tobacco are determined

Sellers and buyers interact in the markets when the sellers are selling their products and buyers looking for goods and services to meet their various needs. Market equilibrium occurs when the desires of both the sellers and buyers align exactly in such a way that neither of the group is offered with a justifiable reason to change their behaviors (Goodwin, Nelson, Ackerman& Weissskopf 2009). The market equilibrium price which is also denoted as p* as well as the equilibrium quantity which is denoted as q* are determined when the demand curve of the buyers, which is D crosses with the supply curve of the sellers which is S. at the price, the amount offered by the sellers equals to the amount that the buyers demand this is clearly shown in the diagram below

ASSIGNMENT 2 – Applied Writing

Diagram showing the equilibrium between price and quantity (Krugman & Wells 2012).

In the absence of the externalities that is the benefits or costs that fall on individuals who are not directly involved in the activity, the market equilibrium quantity q* at the socially and most favorable level of output. For any unit from 0 up to q*, when the demand curve is slightly above the supply curve, this means that consumers in the market at times are willing to pay a high price for those units even past the cost that was incurred when producing the goods and services. This means there are gains for producing the products and also gains from consuming them (Sowell 2011). Price play an essential role in the equilibrating process in that it ensures that all the consumers products and services at the current price can and at the same time all the sellers who selling their goods and services at the going price can also do so with no shortages and excess on either of the sides. A small extension from the above stated partial equilibrium is a market to the general equilibrium reflects the notion that it may not seem to be legitimate to speak out or argue for equilibrium in regard to a particular commodity when the demand and supply in the market depends on the prices of those goods and services (Sowell 2011).

Question 2: Factors causing decline in consumption of tobacco

Based on the article, the two main factors causing the decline in consumption of tobacco is the 12.5% tax hike that have been introduced by the Australian government over the past two years the other factor is the plain packaging legislation which was implemented in 1st of December of 2012. In the capitalist society, prices of commodities and services are determines as a result of the interaction of the sellers and buyers. The preferences of buyers comprise the demand side while the sellers preferences comprises of the supply side in the marketing of tobacco. These two factors have an effect on the equilibrium price and quantity (Krugman & Wells 2012). In regard to the quantity, the high taxes imposed by the government and the plain packaging legislation is that it reduces the equilibrium quantity since smokers has to pay a higher price for commodities and at times they are not sure if they are purchasing the same products that they were using since they are plain packaged. Since the two shifts are to the left, the overall impact is a decrease in the equilibrium quantity. This is clearly shown in the diagram below. This is clearly depicted in the diagram since Q3 is to the left of Q0.

ASSIGNMENT 2 – Applied Writing 1

Diagram: showing the influence of equilibrium quantity and price (Goodwin, Nelson, and Ackerman& Weissskopf 2009).

In regard to price, the effect since to be more profound due to the tax increases and this will ultimately mean an increase in the price of cigarettes and thus the equilibrium will be high. For every increase in tax from the government the cost of the cigarettes will go high while the quantity demanded will ultimately fall. Thus, the higher the price increase the lower the demand of the products since people may ultimately shift to other cheaper products, some may quit while starters may be discouraged from starting to consume tobacco products. Thus is seems that the government need to keep on increasing taxes for tobacco products to curb its usage (DK Publishing 2012).

Question 3: is the demand for tobacco is price elastic or price inelastic?

An essential building block of the economic theory is the idea that by decreasing or increasing the price of products is likely or increase or reduce the demand of the commodity. Thus the development of the term price elasticity of demand which refers to the degree to which the use of a product rises or falls after a decrease or increase in the price (Krugman & Wells 2012). The demand for tobacco is price inelastic and this is mainly based on the fact that the demand for tobacco does not follow or comply with the rule that an increase in price reduces the demand of the product. This means that despite the increase in prices the smokers and consumers are more likely to consume the same packets of cigarettes or sticks. This is supported by the idea that taking tobacco is an addiction and individuals cannot withdraw from it easily. However, there are times when huge price increase for instance, tax increases may play an essential role in changing the consumers behaviors (Sowell 2014). For example is the government increases the tax on cigarettes by 50% to 100% and the producers transfers the entire tax to the consumers the consumers are likely to quit or reduce their intake since the prices will have increased by 50% or 100%. At the same time, those who are addicted are likely to turn into the lowly priced ones or look for substitutes to the products. This will in turn create a better opportunity for the smugglers since the consumers will opt for the lower priced cigarettes as essential substitutes for the highly priced ones. Thus, this explains the reason as to why demand for tobacco is price inelastic (Ritter, Silber & Udell 2000).

Question 4

Taxes acts as important sources of revenue for all governments. Nevertheless, they tend to decrease the demand and supply in the market, since the buyers will be forced to pay a higher price for a commodity and the sellers will receive lower prices for their commodities. At times this burden is divided between the sellers and buyers but at times is not (Lazear 2000). This is not usual the case since the tax incidence which is referred to as definite burden that each of the participants in the transaction shares cannot be authorized by law but it depends on the elasticities of demand and supply respectively. When the supply or the demand is completely inelastic or elastic the tax burden will fall completely on either the sellers or the buyers. When the demand of a product is elastic the tax burden is mainly borne by the sellers. However for those items whose demand is inelastic since there exists no close substitutes to them for example tobacco and alcohol, the tax burden on such items is mainly borne by the buyers. Thus, with tax increment the prices of the products are likely to go up equivalently to the amount of tax added on the product by the government (Mankiw & Taylor 2011). The diagrams below clearly shows the tax incidence is mainly to be incurred by the buyers if the demand of the products is inelastic and when the supply is elastic. If the demand is elastic and supply is inelastic the sellers will cater for the additional costs on their products.

ASSIGNMENT 2 – Applied Writing 2

Diagram 1: diagram on inelastic demand showing that tax incidence is mainly incurred by the buyer (Mankiw & Taylor 2011)


DK Publishing 2012, The Economics Book (Big Ideas Simply Explained), DK, United States.

Goodwin, N, Nelson, J, Ackerman, F & Weissskopf, T 2009, Microeconomics in Context 2d ed. Sharpe Publications, New York.

Krugman, P & Wells, R 2012, Economics, Worth Publishers, United Kingdom.

Lazear, E 2000, ‘Economic Imperialism’, Quarterly Journal of Economics
vol. 115, no. 1, pp. 99–146.

Mankiw, N, & Taylor, M 2011, Economics (2nd ed., revised ed.), Cengage Learning, Andover.

Ritter, L, Silber, W & Udell, G 2000, Principles of Money, Banking, and Financial Markets (10th ed.), Addison-Wesley, Menlo Park C.

Sowell, T 2011, Economics Facts and Fallacies, Basic Books, New York.

Sowell, T 2014, Basic Economics, Basic books, New York.