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Price Elasticity Of Demand Of Cigarettes Economics Essay

We would like to express we special thanks for gratitude to our lecturer Miss Liew to give our opportunity to learn and practise to do this wonderful project on the topic Microeconomics assignment in semester 2 during in August to December 2010. And grateful to Miss Liew for teaching and giving lecture, and her teaching structure is very interesting and it is easy to concentrate in her lecture and to know about so many new things.
A small of finely cut tobacco leaves enfolded in a cylinder of thin paper for smoking is known as cigarette. At one of the cigarettes is ignited and is allowed to smoulder; the other end it is where the smoke is inhaled, which is held in or to mouth and in some cases a cigarette holder may be used as well. Manufactured cigarettes are filtered in the most modern and include reconstituted tobacco and other addictive.
The origin of cigarette is believed that it took place in America. In America is where the production of tobacco began. It is also the place where people started consuming its leaves for smoking and chewing. The Maya civilizations were considered to be the first users in Central America. In South America, the people of Aztecs followed suite and crushed tobacco leaves, wrapped them in corn husks to smoke. During religious ceremonies, this was more popular, which is attributed to the fact that in local pottery of the region priests and deities were shown smoking through pipes.
Price elasticity of demand (Ed) is a measure of the responsiveness of quantity demanded to change in price, in the other words, it is the ratio between a change in price and the resultant change in quantity demanded. The formula is as . The demand for a good service is elastic or relatively elastic when a given change in price is accompanied by a larger proportionate change in quantity demanded. This means the percentage change in quantity demanded is greater than the percentage change in price. The demand is inelastic or relatively inelastic when a given change in price is accompanied by a smaller proportionate change in quantity demanded. This means the percentage change in quantity demanded is less than the percentage change in price.
Referring to the diagram above, when the price of cigarettes rises from P1 to P2, the quantity demanded for cigarettes decreases from Q1 to Q2. The elasticity of the demand curve can be determined by solving the price elasticity of demand of cigarettes,, . This is because when the price of elasticity demand (PED) is less than 1, it is an inelastic demand curve diagram. The diagram is an inelastic demand curve because the price of elasticity demand (PED) is less than 1. Thus the diagram is flatter. The demand for cigarettes is inelastic because of the addiction of individual towards cigarettes. Thus no matter how much the price increases, the demand for cigarettes will only fall a bit.
The new regulations would set the minimum retail price for a stick of cigarette at 32 cent. Currently, a pack of 20 sticks cost RM 9.30 but cheaper cigarettes that cost as low as RM 4.80 per pack are available in the market. When the cigarette was set to the minimum price, that must be have some effect of setting the minimum retail price. For instance, if the demand is an inelastic, the supply of cigarette will increase and the price is allowed to fall. So, the fall in price will lead to a fall incomes to producers. When the price is effective by the minimum prices, the price must be set above equilibrium price as shown in the diagram below. This is because the government feels the price is too low in the market. Therefore, intervenes to establish a minimum price that is higher than the equilibrium price to maintain the income of producers.
When the minimum price is set, the surplus will be happen. The discourage consumption as the good is now more expensive but it will encourage the production. The production will be encourage is cause by the good is more profitable. Besides that, to overcome the surpluses resulting from minimum prices, the government may encourage the demand by buying up the surplus, advertising and finding alternative uses for the goods and cutting down on the availability of substitute.
Future of the country, government needs to increase the price of cigarettes because the move was be in line with government’s commitment to protect children and teenagers from taking up the smoking habit and exposing themselves to chronic diseases and taking drugs. This is to ensure the future generation to grow up in a healthy environment with healthy mind and body which can help in the development of the country.
Cigarettes also will lower the personality image, because many people dislike the action take cigarettes to smoke and dislike the smell around the people. People will keep away with the people who are having smoking habit. Furthermore, foreigner will not come to our country when there are many smokers and it will ruin the reputation of the nation thus the foreigner will not come to our nation to spend their expenses.
Increase the cigarettes can help low income level people. Because when these people do not have more money to purchase cigarettes and to do other thing like sport, working, volunteer.
Government may impose direct taxes or indirect taxes. Direct taxes are taxes paid by individual or organisation. Example of direct taxes is personal income tax and corporate tax. Indirect taxes are taxes on expenditure. Example of indirect taxes is taxes on goods and services. A specific tax or a unit tax is tax that does not change with price but is a fixed amount per unit sold. The taxes are based on the elasticity of the curve.
Referring to above diagram, at the initial equilibrium point a, if the unit tax is ad, total tax amount to be paid to the government is ad x 0Qo. However, the supply curve shifted to the left as a result of tax, the new equilibrium is now at point c. The amount of tax to be paid is now bc x 0Q1, which is the same as bcP1P2. Consumer tax is at P1cfP0 while producer tax is at P0fbP2. In this case, producer pays more tax than consumer. The producers will receive less profit and the consumers have to pay more.
Besides the minimum price, the other government intervene are maximum price and the per unit tax. About the maximum price, government sets this intervene to prevent them from rising above a certain level. When a maximum price is introduced, sellers are allowed to change any price up to price level but sellers are not permitted to go above it. When the maximum price is set, shortage while be occur. The maximum price will encourage consumption as the good is now cheaper but it will discourage production. It is cause by the good is less profitable to produce. In order of maximum price to be effective, government must by set below the equilibrium price as shown in the diagram below.-
Another government intervention is per unit tax. About this intervention, government may impose the direct taxes or the indirect taxes. The direct taxes are paid by individual or organization, for example personal income tax and personal corporate tax. The indirect taxes are paid by producers of the good or service to the government but they can shift the burden of the tax to consumer in the form of higher prices. When a unit tax is imposed, the production of producer’s cost will raise and shifts the supply curve upward by the same amount of tax. The diagram below is show the effect of a unit tax on supply curve.
From the above diagram, the equilibrium price of initially was Pe and equilibrium quantity is Qe. After the imposition tax, the supply curve was shifted left and the new equilibrium price is higher but the new equilibrium quantity is lower. It is clear that the effect of tax is to increase price and reduce quantity. The following diagram below is show the producer shift the tax burden to the consumer.
In this assignment, we notice that the price for the cigarettes keep changes from time to time and it is directly influence the demand of the cigarettes. As an example, when the price of cigarettes per box increases, the demand for cigarettes decreases because people are unable to afford the price of cigarettes. This will causes surplus of the stock for cigarettes in the market. When the price for cigarettes per box decreases, the demand for cigarettes increases because people are affordable to the price of the cigarettes. This will lead to shortage of the stock for cigarettes in the market. However, there will be negative when the prices of cigarettes reduced as more and more of the people addicted to smoking.
In this assignment, we learn more and more understanding about the elastic of demand and more clearly how to calculate the price elasticity of demand. Besides that, let us know the effect of setting the minimum retail price of a stick of cigarette. We also learn more about the government intervention and the effect of government intervention in the market. Furthermore, through this assignment let us more understand how to draw the diagram like maximum price, minimum price, per unit tax etc. This assignment also can let us have more confident in our final exam.

Implications Of The Union Budget Of India Economics Essay

This article starts with highlighting some the basics of the Union Budget 2013-14. It further looks in detail at the planned and non-planned expenditure patterns. A detailed look has been taken at the tax proposals and its impact on individuals and different sectors. A special mention has been made of the views of the Confederation of Indian Industry (CII). The article then concludes by saying that overall it is a lukewarm budget.
IMPLICATIONS OF THE UNION BUDGET OF INDIA 2013-14 Abstract This article starts with highlighting some the basics of the Union Budget 2013-14. It further looks in detail at the planned and non-planned expenditure patterns. A detailed look has been taken at the tax proposals and its impact on individuals and different sectors. A special mention has been made of the views of the Confederation of Indian Industry (CII). The article then concludes by saying that overall it is a lukewarm budget.
KEYWORDS -Union budget India, 2013, highlights , impact, individual, sectors Introduction The Union Budget 2013-14 was presented admist huge challenges posed by the macro- economic environment both in the domestic and global scenario. A majority feel that the Finance Minister (FM) Mr. P. Chidambram has done a commendable job by adhering to many of the public commitments he made in the recent past regarding the level of fiscal deficit in India.
The FM did not announce drastic changes in the tax structure which could have brought in more resources. But given this moderate mop up he has increased outlays on many of the key sectors of the economy like education, health and social sector. Yet he has managed to curtail the fiscal deficit at 4.8 % of the GDP. He has also committed to decreasing subsidies given the next year’s estimate for combined food, fertilizer and petroleum product subsidies is at almost Rs 27,000 crore less than the revised estimates for 2012-13.
Some Important Highlights * Fiscal deficit seen at 4.8 point of GDP in 2013/14
* Faced with huge fiscal deficit, India had no choice but to rationalize expenditure
Borrowing * Gross market borrowing seen at 6.29 trillion rupees in 2013/14
* Net market borrowing seen at 4.84 trillion rupees in 2013/14
* Short-term borrowing seen at 198.44 billion rupees in 2013/14
* To buy back 500 billion rupees worth of bonds in 2013/14
Subsidies * 2013/14 major subsidies bill estimated at 2.48 trillion rupees from 1.82 trillion rupees
* Petroleum subsidy seen at 650 billion rupees in 2013/14
* Revised petroleum subsidy for 2012/13 at 968.8 billion rupees
* Estimated 900 billion rupees spending on food subsidies in 2013/14
* Revised food subsidies at 850 billion rupees in 2012/13
* Revised 2012/13 fertiliser subsidy at 659.7 billion rupees
Expenditure * Total budget expenditure seen at 16.65 trillion rupees in 2013/14
* Non-plan expenditure estimated at about 11.1 trillion rupees in 2013/14
* India’s 2013/14 plan expenditure seen at 5.55 trillion rupees
* Revised estimate for total expenditure is 14.3 trillion rupees in 2012/13, which is 96 point of budget estimate
* Set aside 100 billion rupees towards spending on food subsidies in 2013/14
Revenue * Expect 133 billion rupees through direct tax proposals in 2013/14
* Expect 47 billion rupees through indirect tax proposals in 2013/14
* Target 558.14 billion rupees from stake sales in state-run firms in 2013/14
* Expect revenue of 408.5 bln rupees from airwave surcharges, auction of telecom spectrum, licence fees in 2013/14
Current Account Deficit India’s greater worry is the current account deficit – will need more than $75 billion this year and next year to fund deficit
Inflation Food inflation is worrying, but all steps will be taken to augment the supply side.
Plan and Non-Plan Expenditures Planned expenditures have been reduced by 20% from that budgeted for FY 2013 in to attain the projected deficit number of 5.1%. This is giving some jitters to the investor community. Planned expenditures in India’s budget refer to discretionary expenditures which can increase the productive capacity of the economy – for example, public infra spending, capital expenditure programs of public sector units and capital expenditures in the agriculture sector such as strengthening irrigation facilities / dry land farming etc.
On the contrary in the view of many economists curtailment of planned expenditures can have an adverse impact on long-term capital asset creation in the economy. On the other hand non-plan expenditure has not been reduced at all. It has actually been increased by 5% on the revenue account. It is slated for a further 10% increase in FY 2014.
This brings us to question of what non-plan expenditure is. It primarily comprises of subsidies – food, fertilizer and petroleum – and other transfer payments, salaries, pensions etc. The 10% increase in non-plan expenditure projected for FY 2014 appears optimistic and quite on the lower side. A matter of concern is however the fact that the three critical areas of food, fertilizer and petroleum subsidies have not seen any determined attempts at long-term reduction.
Budget Proposals and the Implications for Different Sectors Individuals Income Tax Slabs Income Tax Rates Where the total income does not exceed Rs. 2,00,000/-.
Where the total income exceeds Rs. 2,00,000/- but does not exceed Rs. 5,00,000/-.
10% of amount by which the total income exceeds Rs. 2,00,000/-
Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-.
Rs. 30,000/- 20% of the amount by which the total income exceeds Rs. 5,00,000
Where the total income exceeds Rs. 10,00,000/-.
Rs. 130,000/- 30% of the amount by which the total income exceeds Rs. 10,00,000/-
Education Cess: 3% of the Income-tax.
A tax rebate of Rs 2,000 is proposed to be allowed for taxpayers earning total income of up to Rs 5 lakh. This increases the basic threshold limit for tax trigger at Rs 2.2 lakh for taxpayers with income up to Rs 5 lakh. However there was no relief for taxpayers earning total income above Rs 5 lakh. Simultaneously the FM imposed a 10% surcharge on income tax for those earning above Rs 1 crore. This is a mere 42,800 in number.
Those taking new home loans of up to Rs 25 lakh during 2013-14 for purchase of their first residential property not worth above 40 lakhs will be eligible for an additional deduction of 1 lakh on interest payable The unutilized deduction amount can be carried forward to the next year.
Women Empowerment The government has we had seen all along above adopted a ‘pro-poor, anti-rich’ stance. In addition the FM in the budget 2013 showed a lot of concern for women. Among the many proposals notable was the “Nirbhaya” fund with an allocation of 1000crores. It is aimed at protecting women. He also announced the starting of a all-women public sector bank with n allocation of 1000 crores.
Corporates There is a reason for corporates to cheer. There is an incentive for them to invest as 15% of spending of over Rs 100 crore on new plant and machinery in the next two years qualifying for a deduction.
Securities Market The markets had some sops too. This was in the form of lower tax on securities transactions and easier procedures for foreign portfolio investors. But on the other hand there was a fresh levy, equivalent to the tax on securities transactions, on non-agricultural commodity futures.
Impact on Banks The budget proposals will benefit government banks through equity infusion and gradual easing in stress on infrastructure loans. However, the level of non-performing loans (NPL) might be high because of the continued focus on agricultural credit. An equity injection of Rs 14000 crores in FY 2014 was planned. This was to maintain the momentum of all initiatives proposed since FY 09. The FM further pledged commitment when he said banks will always meet the Basel III capital norms. Private sector banks were encouraged to become competitive by creating a level playing field for them by extending them the interest subvention scheme.
Impact on Healthcare The FM pledged that the government was hell-bent on providing ‘Health for All’ or ‘Universal Health Coverage’ and promised Rs 37,330 crore, an increase from Rs 30,702 last year, for the health ministry to achieve this. Here are some are some highlights of the sops:
The Ministry of Health and Family Welfare got an allocation of Rs 37,330 crores
There is a proposal to create a National Health Mission and this NHM will be given Rs 21,200 crore.
The FM allocated Rs 4,721 crores to improve medical education,
An allocation of Rs 300 crores was made to alleviate child malnutrition.
The Ministry of Women and Child Development was asked to frame a better for the improvement of the condition of women in the country. He allocated Rs 97,000 crores for women’s development
To improve the childcare health and education facilities, the FM made an allocation of Rs 76,000 crores.
The FM attempts to create a comprehensive social security package to make insurance more accessible to Below-Poverty Line families.
The FM added with a hint of humour that tobacco, the Government’s favourite taxable product would attract a Special Excise Duty (SED) of 18%. This would apply to all tobacco products like cigarettes, cigars, cheerots.
Auto Industry The Union Budget has received a mixed response from the Indian auto industry. Some called it the worst-ever and some called it fair or even neutral. The budget was not well received because of its hike in the excise duty on Sports Utility Vehicle (SUV) and luxury models. Joginder Singh, President and Managing Director (MD), Ford India Private Limited (FIPL), said, “As we all know the automotive industry has been going through very challenging times, we are disappointed with the increase in the excise duty for SUVs.”
Textiles The budget announced a zero excise duty on cotton textiles at the fibre, yarn, fabric and garment stage. This will help reduce prices of end products. The reduced prices will further boost garment demand amid weak consumer sentiment. This move will undoubtedly promote revenue growth and improve operating profit and cash flows of the textile sector. The budget in continuation of the Technology Up-gradation Fund Scheme in the Twelfth Five Year Plan allocated Rs2,400 crore for technology up-gradation. This is likely to encourage investments power loom modernisation.
Impact on Infrastructure The Union Budget 2013-14 addressed some of the many challenges faced by the infrastructure sector. However the solutions for some of the problems have to necessarily be found outside the framework of the annual budget.
The budget announced the setting up of a regulatory authority for roads. This was long pending. If the board can be constituted quickly vested with enough powers it has the potential to address many of India’s highways development programmes. There was an announcement that 3,000km of road projects will be awarded in the first six months of FY14. This seems ambitious given that less than one-fourth of that number was achieved in the first eight months of FY13. However the target could be achieved if this is sought to be done on the engineering, procurement and construction (EPC) route, rather than the build-operate-transfer (BOT) model. The EPC route will avoid some of the challenges in the BOT model viz., developer apathy, commercial bank aversion to funding toll road projects and over-optimistic traffic forecasts, the latter adversely affecting credit profiles of many projects in the past.
Impact on the Telecom sector The budget did not offer did any special sops for the struggling telecom industry in India. Just one announcement was made that duty would increase on mobile phones priced above Rs 2000. It also announced a 5 percent duty hike on STB (set up boxes), and zero customs duty on import of plant and machinery for the semiconductor industry. The FM did nothing to boost telecom sector investor’s confidence.
Education The budgetary allocation to Ministry of HRD for various schemes has been increased by 17% to Rs.65, 877 crore. A service tax exemption has been granted for institutes offering vocational courses. Under the total budgetary allocation, Rs 272.58 billion has been allocated for Sarva Shiksha Abhiyan. Sum of Rs 39.83 billion for Rashtriya Madhyamik Shiksha Abhiyan has been allocated. Further a sum Rs 52.84 billion has been allocated for scholarships and remaining for up-gradation of existing universities and other education schemes. Companies engaged in providing education and allied education services stand to gain.