According to the article (star 3 October 2010), Cigarette prices to go up tomorrow, the
cigarette prices in Malaysia were rise from 9ringgit 30sen to 10 ringgit
Malaysia. It went up by 70sen for a pack of 20 sticks cigarette. According to a
report by a Chinese daily, 70sen increase in cigarette is one of the highest in
recent history, with previous hikes it raises in between 10 and 30sen. However
the high-grade cigarettes packs hike would cost as much as RM14. The government
predicted that the price hike can cause the cigarette sales drop by 10 percent.
The government predicted that with rises in the price
of cigarette’s pack will cause the sales of the cigarette’s pack drop by 10
percent. Why the price increase will cause the sales decrease? This situation
is basically link with the law of demand. The law of demand says that the higher
the price of a good, the smaller is the quantity demanded. The price of
cigarette increase, the quantity demanded of cigarette will decrease;
automatically the sales of cigarette will decrease. The reason of this is
because of the income effect and the substitution effect. Income effect means
when the price of a good or service rises relative to income, people cannot
afford all the things they previously bought, so the quantity demanded of the
good or service decreases. For instance, before the price increase, a person with
his/her salary can afford to buy 30 packs of cigarette a month, but with
increasing the price of cigarette would cause him/her to buy only 25 packs of
cigarette a month because his consumption limit. As a result, the quantity
demanded of the cigarette for personally affection dropped from 30 to 25 per
month and if the big amount of smokers has occurs with this income effect it
would cause the quantity demanded of cigarette in the market decrease. However,
substitution effect means when the relative price of a good or service rises,
people seek substitutes for it, so the quantity demanded of the good or service
decreases. For instance, some people like to have 5 times shisha and 3 packs
cigarette for a week, because of the price of cigarette increase, some people
rather takes 8 times shisha and without cigarette for a week. This results the
substitution effect that some people substitute their cigarette with the
shisha. This also may cause the quantity demanded of the cigarette decrease.
The example of a demand curve for cigarette :
From my understanding of a demand curve, the example
of a demand curve for cigarette is shown above. At Point A, the cigarette is
priced at RM9.30 with 10 thousands of cigarette pack a week for quantity
demanded. However, at Point B, the cigarette is priced at RM10.00 with 9
thousands of cigarette pack a week for quantity demanded. A demand curve says,
a rise in price, other things remaining the same, brings a decrease in the
quantity demanded and a movement up along the demand curve. Thus, with the
price went up, which is movement up along the demand curve from point A to
point B, the quantity demanded decreased by 1 thousand of cigarette pack per
week.
Before the cigarette price rises, we expected the
market is in an equilibrium situation which opposing forces balance each other
and cigarette market have a balance towards suppliers who will supply at the
reasonable price that consumers will purchase at the same time. After the
cigarette price rises, the government expected the sales and demand of cigarette
will go down which bring the price floor concept to this situation. In cigarette market, when the quantity of
cigarette supplied equals the quantity of cigarette demanded. There is neither
a shortage nor surplus. But at the cigarette rate above the equilibrium rate,
the quantity of cigarette supplied exceeds the quantity of cigarette demand and
there occurs surplus. This will cause the suppliers supply too much and
consumers does not want to buy that much. At this time, some of the sellers
will pay the entire tax imposed to lead the market back to normal that the
sellers will earn the profit
Cigarettes price increase normally happens with the
tax incidence. There were almost six million
smoking-related deaths globally in 2011 and 10 percent of which were in Asean country.
Government imposed this high tax hike of cigarettes is to protect the health
and well-being of its citizens. However, tax incidence is the division of the
burden of a tax between buyers and sellers. If the price rises by the full
amount of the tax, buyers pay the tax. It depends on the elasticity of the
demand. But, is the demand of cigarette elastic or inelastic? I believe that
the rise in price of cigarette’s pack is not a problem to the market because
the demand for the cigarette is inelastic. The more inelastic the demand, the
larger is the buyers’ share of the tax. The demand of cigarette is considered
in perfectly inelastic demand, which buyer pay the whole tax. The reason of
this is because smokers have their mentally habit and unlimited desire towards
the cigarette, no matter how the cigarette’s prices increase, smokers will
still buy it which is beneficial to the sellers. For instance, for a person who
addicted or have a habit of smoking, they would not easily get rid from smoking,
that is why the demand of cigarette is inelastic.
The graph shown, the
rises at price at point A to point B, and the quantity demanded does not
change, which mean the buyers pay the entire tax and it is perfectly inelastic
demand.
Author : LENG KIAN EE
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