Nowadays, we can see smokers everywhere. It is obvious that the number of smokers has increase dramatically over the last century. People tend to smoke because they consider smoking to be “cool” or “sexy” for the younger generations. However, smokers tend to enjoy smoking cigarettes even if they are aware of the negative effect that cigarettes may cause. They ignore the possibilities of having lung cancer for the sake of being “cool”. Although smoking is considered as an addictive habit that is harmful to the human body, the numbers of smokers are still increasing year by year.
http://thestar.com.my/news/story.asp?sec=nation&file=/2013/6/2/nation/20130602203309
According to the article “BAT Malaysia ups cigarette prices” from The Star Online (2 June 2013), it is show that the price of cigarette will increase by a total of 3%. From the article, the managing director of British American Tobacco, Datuk William Toh said that “To overcome mounting costs and illicit trade pressures we have decided to take a small 3.0 per cent price increase on all our cigarette brands.”
From the article that I have chosen, I think that it is able to apply in the concept of Law of Demand. Sloman, Wride and Garratt (2012) defines that the law of demand is the quantity of a good demanded per period of time will as the price rises and rise as the price falls while the other factors remain unchanged.
Based on the graph above, it shows a negative relationship between the price and quantity demanded. Therefore, the demand curve will be downwards sloping. When the price of the cigarettes increased from P1 to P2, the quantity demanded for the cigarettes will decrease from QD1 to QD2. This scenario reflects on the law of demand when the price of a good increase, the quantity demanded will fall. However, the quantity demand does not fall for no reason. It can be explained by the income effect and the substitution effect. The income effect is when the price change affects the buyer’s purchasing power. People might feel that they are not able to afford to purchase a higher price for the cigarettes as much as they bought in previous time. Meanwhile, the substitute effect is when the price change affects people by switching to alternative goods. From this scenario, it can demonstrate when smokers find other goods to replace cigarettes such as Tobacco plant to satisfy themselves. Thus, this briefly explained the relationship of the price and quantity demanded for cigarettes and why is it so.
From the concept Law of Demand for cigarettes, it can be linked to the concept of Law of Supply. When the price of cigarettes increases, suppliers are more willing to supply more amounts of cigarettes because suppliers can earn more profit from it, thus supply will also increase. Sloman (2008) states that the law of supply is the relationship between the price and the quantity supplied, when the price increase, so does the quantity supplied. Hence, from this scenario, it directly reflects to the concept of law of supply.
Based on the graph above, it shows a positive relationship between the price and the quantity supplied. Therefore, the supply curve will be upward sloping. When the price of the cigarettes increase from P1 to P2, the quantity supplied also increase from QS1 to QS2. This is because as firms supply more, they are likely to realize that the higher of the price for cigarettes, the more profitable it becomes to produce.
However, the demand and supply is not determined simply by the changes in price. It can also be determined by other factors. From this scenario, demand and supply can be affected by the expectation of future price changes. If people think that the price of cigarettes is going to rise in the future, they are likely to purchase more on it before the price increases. In the other hand, if the suppliers expect a rise in the price of cigarettes, suppliers may temporarily reduce the amount they sell to build up their stock and only release them on the market when the price increases. Hence, in this situation, the demand of cigarettes will increase while the supply decreases. These changes will affect the demand and supply curve to shift either towards the left or the right.
From the graph above, it shows the shift of the demand and supply curve. When consumers expect a rise in the price of cigarettes, the demand will increase, thus causing the demand curve to shift to the right. Meantime, when supplier expect a rise in the price of cigarettes, the supply will be reduced, causing the supply curve to shift to the left.
http://thestar.com.my/news/story.asp?file=/2012/9/3/nation/11959171
According to the article “More rules to deter smoking New price control on cigarettes introduced” from The Star Online (3 September 2012), it is stated that the government had decided to set a price floor of RM7 for the 20 sticks pack cigarettes due to the increase of demand for cigarettes. This also means that it is illegal for supplier to sell cigarettes at a price lower than RM7 and to sell packs with less or more than 20 sticks.
In this world, cigarettes are considered as inelastic goods. This is because no matter how the price of the cigarettes increases, it will not have a huge impact on the quantity demanded. This reflects on to the concept of price elasticity of demand. Sloman (2008) define that price elasticity of demand is a measure of the responsiveness of quantity demanded to a change in price. Thus, in this situation, even if the government implemented a price floor to decrease the demand for cigarettes, smokers will still continue smoking.
Price floor is an economic term that restricts the suppliers to sell goods at a price lower than the specific level. In this scenario, price floor is used to reduce the consumption of cigarettes because it is harmful to human beings. However, there are still a number of people who are still willing to purchase the cigarettes no matter how high the price had gone up because cigarettes are inelastic goods. For a price floor to be effective, it is usually placed above the equilibrium price. However, the quantity demanded for cigarettes will not drop dramatically since cigarettes are inelastic goods.
From the graph above, it is shown that the price floor is set above the equilibrium price, thus, creating a surplus in the market. When a price floor is set, market failure will exist because there will be an underproduction in cigarettes. A price floor opens up a gap between the buying price and the selling price and this result in inefficient underproduction. Therefore, if the market is underproduction, the surplus problem in the market will be solved. Although the price floor makes the marginal social benefit exceed the marginal social cost, eliminating the producer surplus and consumer surplus, it will create a deadweight loss in the market. An underproduction is a deadweight loss to the social because the condition given does not fulfill the people in the market. Hence, when the price floor is set, smokers who do not have a high income will look for a cheaper cigarette to buy. In this situation, black market might arise at where the cigarettes would be sold at the primary market price. In the black market, smokers are looking for suppliers that are willing to sell the cigarettes in a lower price compared to the real market while supplier are looking for buyers that are looking for cheaper cigarettes. Hence, when buyers and suppliers carry out trade activities in the black market, it will cause deadweight loss to society.
From the graph above, it shows that the grey region represent the deadweight loss. The blue triangle represent the consumer surplus and the orange triangle shows the producer surplus. While the black region shows the tax paid by the buyers, which is also the government’s tax revenue. Because of the inelastic demand for the cigarettes, the quantity demand will not change even if the price of the cigarettes have increase due to the taxation charged by the government. Hence, the buyer will pay the entire tax charged by the government.
http://thestar.com.my/news/story.asp?file=/2012/12/28/nation/12510748&sec=nation
The black market sells the cigarettes at a lower price than the real market because the cigarettes in the black market are not taxed. According to the article “Illegal cigs sold at half price” from The Star Online (28 December 2012), it states that cigarettes are sold at a price between RM2.50 and RM5 for a pack of 20 sticks. This means that the price sold is far below the minimum price set for cigarettes which is RM7 per pack. The news also reported that Malaysia had become the world’s No.1 country for the trade of illegal cigarettes.
In conclusion, the price floor set by the government does not have a large impact towards the demand for cigarettes because cigarettes is an inelastic goods. Thus, raising the price of cigarettes will not decrease the demand by a lot. It will only affect the smokers that are low income earner and thus, creating a black market for these smokers to buy cigarettes for their satisfaction. In my opinion, to reduce the demand for cigarettes, government should have anti-smoking campaign to warn smokers about the danger of smoking cigarettes.
(1592 words)
References
Sloman, J. 2008. Economics and the business environment. Harlow: Financial Times Prentice Hall.
Sloman, J., Wride, A. and Garratt, D. 2012. Economics. 8th ed. Pearson.
The Star Online. 2012. BAT Malaysia ups cigarette prices. [online] Available at: http://thestar.com.my/news/story.asp?sec=nation&file=/2013/6/2/nation/20130602203309 [Accessed: 5 Jun 2013].
The Star Online. 2012. More rules to deter smoking New price control on cigarettes introduced. [online] Available at: http://thestar.com.my/news/story.asp?file=/2012/9/3/nation/11959171 [Accessed: 5 Jun 2013].
The Star Online. 2012. Illegal cigs sold at half price. [online] Available at: http://thestar.com.my/news/story.asp?file=/2012/12/28/nation/12510748&sec=nation [Accessed: 5 Jun 2013].
