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Elasticity of Demand and Supply - Tutorial Section B

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andrea liuyin

on 29 April 2010

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Transcript of Elasticity of Demand and Supply - Tutorial Section B

Elasticity of Demand and Supply
Tutorial Section B 2b) The World Health Organisation (WHO) advocates the raising of tobacco prices worldwide, through taxation, to stamp out smoking. i) comment on the effectiveness of such a measure. [8] effective smoking = habitual + addictive
--> demand for cigarettes = price inelastic
--> rise in P will cause Qd to fall less than proportionately
--> Qd will not fall very much unless tax is raised substantially.
ineffective increase in taxes --> increase in marginal cost of production --> fall in supply --> rise in P; fall in quantity demanded.

incentive to smuggle will be reduced
--> substantial difference in P of tobacco between countries (price disparity)
--> if ALL countries raised P of tobacco
--> elimination of price disparity of cigarettes between low-tax and high tax regimes ineffective in developed countries
--> Ep (developed countries) = 0.4
--> Ep (developing countries) = 0.8
overall still ineffective cigarettes are sold at different prices in different countries
--> tax raised much more substantially in poor countries
--> difficult for countries to agree conclusion
--> more effective in poor countries
--> however, overall still ineffective
--> unless governments in poor countries are prepared to increase tax on cigarettes very significantly
(highly impossible due to political reasons) i) comment on the effectiveness of such a measure. [8] ii) To what extent do you agree with the view that raising taxes on tobacco "disproportionately burdens the poor"? [6] disagree claim: tobacco manufacturers
--> vested interest in getting the government to lower the taxes imposed
--> increase in taxes --> fall in profits what are the effects of raising taxes on equilibrium price and quantity?
do you think there will be any effects on smuggling activites?
what kind of demand does cigarettes have? which line/phrase tells you so?
do you think effects felt will be the same worldwide?
whose perspectives should we consider? agree who is making the claim?
what are the tobacco manufacturers concerned with, and what are the effects of increased taxes on them?
why do you think they made that claim?
is this a strong argument? firms vs consumers
--> how will the tax burden be distributed?
--> what determines the incidence of tax burden borne by consumers and producers?
rich consumers vs poor consumers
--> what are the differences in impacts between poor and rich consumers? conclusion? firms vs consumers
--> tax burden dependent on Ep, Es
--> demand = price inelastic; supply = price elastic
--> incidence of tax borne mostly by consumers

rich consumers vs poor consumers
--> tobacco = higher proportion of poorer consumers' income
--> disproportionately burdened 2aiii) explain how the real prices of cigarettes could fall despite a rise in its nominal price. [2]
source of claim questionable, assertion theoretically sound
agree with the view to a large extent administrative matters progress test 2
week 8, 2nd lecture slot (14th may, friday) topics:
demand and supply
price mechanism + government intervention (only taxes and subsidies)
elasticity of demand and supply format:
1 mini case study question
1 essay question
55 min
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