Report answering 4 questions on microeconomic problems including diagrams

Demand is the amount of tobacco that the buyer can be willing and able to buy at a given prices. On the other hand, supply can be defined and the amount of tobacco that the supplier can be able and willing to supply into the market at a given price. The supply and the demand are said to affect the market price where the interaction of the supply and demand in a perfect competition market is the only mechanism used in the process of determining the prices in the market (Goodwin, et al. 2009). The demand is said to increase with a decrease in the prices that the supplier is willing and able to buy the tobacco into the market. An increase in the prices of the products in the market results in a decrease in the demand. The prices can be increased due to the increase in taxes or even the increased costs of production.

Increased demand results in an increase in the market price as the supplier bargaining power are said to increase because of the increased number of the customers in the market. On the other hand increase in supply leads to decrease in the quantity demanded as the supplier might be supplying to the market more goods than the demand hence leading to a surplus.

The price increase in the market results in increased supply of the products in the market as the suppliers are willing to utilize the opportunity of the increased prices in the market. A decrease in the prices can result in decreased supply as the supplier might be reluctant to supply their products to the market at low prices.

The relationship that does exist between the market demand and prices is referred to as demand relationship where the changes in prices do affect the demand. On the other hand, supply relationship is the relationship that does exist between prices and supply where the supply is said to change with the changes in the prices.

Equilibrium process

Supplying more products than the demand leads to excess supply hence resulting in a reduction in prices. The moment the quantity demand surpasses the quantity supplied leads to excess demand hence making the prices increase. As a result, there is the need to balance the demand and the supply to a point where the supply is equal to the demand. This point is referred to as the equilibrium point where the supply equals the demand hence determining the equilibrium quantity and price in the market.

report answering 4 questions on microeconomic problems including diagrams

Source: http://www.investopedia.com/university/economics/economics3.asp

The tobacco demand is inelastic as a high change in the prices results in a small change in the quantity demanded. The government has been looking for the best ways of ensuring that the tobacco demand is decreased by increasing the taxes that has led to increased prices. However, the increased prices have not led to increased change in the demand as many tobacco users are addicted and they can live without the smoking. As a result, despite the efforts of the government to ensure that the tobacco is priced highly does not lead to significant decrease in the demand for tobacco.

The demand of the tobacco is said to change slightly with the change in the changes in the prices of the tobacco. The demand elasticity is said to be the measure of how the buyer does respond to the changes in the prices. For the tobacco smokers, the demand is said to be inelastic as the buyer are likely to show a slow response to the change in the prices of the cigarettes (Goodwin, et al. 2009). The quantity demanded is not likely to change despite the changes in the prices as the buyers are not willing to stop smoking. The government has been increasing the taxation on tobacco in the process of increasing the prices to discourage the tobacco users. However, despite the increased prices due to the taxation, the tobacco users seem not to feel the changes in the prices and the tobacco demand changes slightly despite the high prices.

Incidence of sales tax

The incidence of tax entirely depends on of the behaviour of the consumers in the market. The portioning of the taxes imposed on the sellers or the buyers varies with the way buyers respond to the changes in the prices. In the inelastic demand as demonstrated by the tobacco buyers, the respond to the price changes is very small making the tax burden fall on the consumers. The aim of the tax burden being transferred to the consumer is to discourage the consumption of tobacco due to its heath implications (Goodwin, et al. 2009). The government is likely to be the winner as it can be in a position to collect more revenues due to the increased taxes on tobacco. The losers are the consumers as they are going to pay more for tobacco as the new tax will be introduced hence paying more for tobacco.

report answering 4 questions on microeconomic problems including diagrams  1

Source: https://phoebeyenlei.wordpress.com/2013/06/09/economic-analysis-of-tobacco-products/

There are other policies that the government can implement in the process of discouraging smoking apart from taxation. The tax policy has not been effective in the process of discouraging smoking as the smokers have been willing to buy the tobacco at high prices. Some of the policies that can assist in discouraging smoking can include educating the society on the effects of smoking. The government can come up with programs that are aimed at educating the society on the health effects of smoking tobacco. This can assist in discouraging people from starting smoking as they can be aware of the health implications of smoking. Besides, the government can come up with policies that can assist the addicted smokers to stop smoking by starting counselling centres for the addicted smokers. Also, some policies can be formulated and implemented to start teaching the effects of abusing drugs like tobacco in schools. This policy would be crucial in ensuring that the youth does not start smoking hence assisting in reducing the number of smokers (Goodwin, et al. 2009). The winners after implementing the new policies can be the smokers as they can be in a position to avoid the effects of tobacco on their health. The losers are likely to be the government as the government will lose revenues that are collected from taxes as the tobacco will decrease. The effects of the alternative policies can be shown by the demand and supply model below.

report answering 4 questions on microeconomic problems including diagrams  2

Source: author, Goodwin, et al. (2009).

References

Goodwin, N, Nelson, J; Ackerman, F & Weisskopf, T 2009. Microeconomics in Context 2d ed. Sharpe.

https://phoebeyenlei.wordpress.com/2013/06/09/economic-analysis-of-tobacco-products/

http://www.investopedia.com/university/economics/economics3.asp