Demand & Supply and Elasticity

Price of Cigarettes Increased

Article
http://thestar.com.my/news/story.asp?sec=nation&file=/2013/6/2/nation/20130602203309

Demand and Supply and Elasticity

Summary

From the article, it tells us that there is an increase on price of cigarettes in Malaysia. According to British American Tobacco Malaysia (BAT Malaysia) (The Star Online, 2013) has announced that there is a 3% increase in price of all its cigarette brands starting from Monday which is 3rd of June 2013. BAT managing director Datuk William Toh says that due to inflationary pressures, labour and input costs, it leads to the rising in operating costs over time and a minor increase in price of cigarettes.

Opinion

            The habit of smoking cigarettes is considered to be cool or sexy for the generation nowadays (Listverse, 2009). Many people are enjoyed on smoking cigarettes. According to Global Adult Tobacco Survey (2011), the overall percentage of smokers in Malaysia is about 22.9% of the populations. Although smoking cigarettes is bad to the health, but amount of smokers still increasing year by year.

            In my opinion, the article related to the concept of Law of demand. Law of demand says that the higher the price of a product, the smaller the quantity demanded for the product (Parkin, 2010). When the price of the product increases, the demand of the product will decrease. There is a negative relationship between the price of product and quantity demanded. Diagram 1 shows the demand curve.

In the case, there is a rise in 3% of the price of cigarettes starting from 3^rd of June 2013. As the price of cigarettes rises, the quantity demanded of cigarettes will decrease because the willingness for people purchase it has decreased and people might not afford to pay more for cigarettes. This is the income effect brought by the rising in price. People will feel poorer when their income does not rise but the price of product increased. Thus they will not be able to buy so much of the good will their little income and that lead to purchasing power of consumer has fallen. So, there will be a movement along the demand curve when the price is increased. Diagram 2 shows the quantity demanded for cigarette shifted from Q0 to Q1 when the price increased from RM 10.20 to RM 10.50.

 The substitute effect will affect the demand result of a product. When quantity demanded of cigarettes goes down, there will be another substitute effect. A substitute is a good can use to replace of another good (Parkin, 2010). For this case, the substitute good of cigarettes is tobacco. Smokers will find Tobacco plants to satisfy their wants when they cannot afford the new price of cigarettes. When the price of cigarettes rises, people will buy fewer cigarettes and more on Tobacco. The demand for Tobacco will increase.

Besides that, the quantity demanded and price of complementary goods will be affected by an increase in price of the product. Complementary good are a pair of goods which consumed together, as the price of one goes up, the demand for both goods will decrease (Parkin, 2010). The complement good of cigarettes which is lighter will be affected by the changing in price of cigarettes. If the price of cigarettes increases, the quantity demanded of cigarettes will decrease and the quantity demanded of lighter will decrease as well. Thus, people will not purchasing lighter if they do not purchase cigarettes. In diagram 3, it shows the shift in demand curve of lighter to the left when the price of cigarettes increased.

If the expected future price will increase, the current demand for the good will increases and the demand curve will shift rightward. This is because consumers will protect their benefits to buy more before the price has increased. Diagram 4 shows the demand curve of cigarettes shifted to right (D0 à D1) when the price is expected to increase in future.

This also related to the Law of Supply. Law of supply says that the higher the price of a product, the higher is the quantities supplied while other things remaining the same (Parkin, 2010). There is a positive relationship between the price of product and quantity demanded. When the price rises, the producer will produce more; when the price decreases, the producer will produce lesser. Diagram 5 shows the positive relationship between price and quantity supplied.   

 In this case, when the price of cigarettes increased 3%, the quantity supplied will increase. This is because the producer need to earn more to cover operating costs as stated in the article. So there will be a movement along the supply curve. Diagram 6 shows the change in quantity supplied of cigarettes from Q0 (before the price increased) to Q1 (after the price increased).  

 There will be a shift in supply curve when the suppliers expect that the price of cigarettes will increase. If the price expected to increase, suppliers will decrease the production and lead the supply curve shift leftward. This is because they can produce more and earn more when the price increases. Diagram 7 below shows the shift in supply curve when the price of cigarettes increases. The supply curve shifted from S0 to S1 when supplier expects the price will increase soon.

 Price Elasticity of Demand

Price elasticity of demand is a units-free measure of the responsiveness of quantity demanded given the change in price while all other influences on purchasing plan remain unchanged (Parkin, 2010).

Formula to measure the elasticity of demand is:

There are 3 types of price elasticity of demand.

1. Elastic (Ɛ > 1). This is when a small percentage change in price causes a bigger percentage change in quantity demanded.

2. Inelastic (Ɛ<1). This is when a big percentage change in price lead to a smaller percentage change in the quantity demanded.

3. Unit elastic (Ɛ=1). This occurs when the percentage change in price is equal to the percentage change in quantity demanded.

In another case, the article says that in a local study done in 2004, the estimated price elasticity of cigarettes in Malaysia was 0.38 (Nik Mohamed, 2011). This means for every 10% increase in the price of cigarette, the quantity demanded by the market is decreased 3.8%. Which means cigarettes in Malaysia is an inelastic demand. In diagram 8 below, it shows the small change in quantity demanded by the market when the price increased.

           

	In conclusion, smoking cigarettes will cause many health issues for example lungs cancer, stomach cancer and cardiovascular disease and bring so many disadvantages to us. Malaysia government should set a minimum selling price of cigarettes for example RM30 per packet so that smokers will reduce the frequency of smoking. When government set a minimum price, seller would not sell cigarettes under the price because this is illegal. When price is pull up by government, the quantity demanded for cigarettes will decrease. Thus this can reduce the amount of smoker who killed by disease caused by smoking cigarettes in Malaysia. (1370 word) References   Global Adult Tobacco Survey (2011) Tobacco Survey. Available from: http://www.moh.gov.my/images/gallery/Report/GATS_Malaysia.pdf [Accessed 5 June 2013] Listverse (2009) 30 Fascinating Cigarette Smoking Facts. Available from: http://listverse.com/2009/01/11/30-fascinating-cigarette-smoking-facts/ [Accessed 5 June 2013]   Nik Mohamed, M.H. (2011) Way to Snuff Out Habit. The Star Online 4 October. Available from: http://thestar.com.my/news/story.asp?file=/2011/10/4/focus/9623523&sec=focus [Accessed 5 June 2013] Parkin, M. (2010) Economics. 9th ed. Boston: Pearson Education Inc. The Star Online (2013) BAT Malaysia ups cigarette prices 2 June. Available from: http://thestar.com.my/news/story.asp?sec=nation&file=/2013/6/2/nation/20130602203309 [Accessed 4 June 2013]. Link of my blog http://chee-xian-microeconomics.blogspot.com/