The Economics of Cigarette Taxes

            Today, the cigarette tax is varying in different localities. Some state set 1.51dollars per pack, another state set only 12cents per pack. However, the federal tax on cigarettes is 39cents per pack. Now, the national trend in cigarette taxes is getting higher because smokers have more health problems than nonsmokers and so incur greater medical costs than nonsmokers. Furthermore, it can help people to stop smoking if government set the highest taxes.

In this case, when government set higher taxes on cigarettes, people have to think whether the tax is imposed on producer or consumer. If there is no tax, the demand curve is D1 and the supply curve is S1. If the tax is imposed on producer, the supply curve shifts to the left from S1 to S2 and it is affected by the tax (RM0.50). So, the equilibrium quantity is Q2 and the price paid by consumer is P2. However, the price received by producer is P2 – RM0.50 because producer has to pay RM0.50 for tax. If the tax is imposed on buyer, the demand curve shifts to the left from D1 to D2 and it is affected by the tax (RM0.50). The equilibrium quantity is Q2 and the price paid by consumer is P2. However, the price received by producer is P2 – RM0.50 because consumer has to pay the tax. Those are definitely same between left shift in the supply curve and left shift in the demand curve. One major difference is that if the tax is imposed on producer, the supply curve will be affected and if the tax is imposed on consumer, the demand curve will be affected. The reason why it is same is buyers and sellers can share the burden of the tax.

 

 



 

           The supply of cigarette will be decreased when the price is increased. This is because, many people do not want to buy cigarette when the price is increased as some of them receives low income. Those who receive low income will have to think twice before purchasing the cigarettes. However, consumers who do not face any financial problems will be able to purchase cigarettes. On the other hand, the demand of cigarette will be increased when the price is decreased because the barrier to entry will fall. In this case, the supply curve does not shift but it moves along the curve because when the price changes, it does not affect a shift in the supply curve. However, the demand curve will shift to the left because the price will be increased, at the same time, the consumption will be decreased. However, the demand of cigarettes is inelastic, as the cost of cigarettes will be increased drastically, oppositely the consumption will be decreased.

 

 

 

           Equilibrium will be changed from E1 to E2 when the price increases because the demand curve will shift to the left. When the price increase and the supply decrease, the equilibrium will be affected. Basically, when the supply or demand curve shift, the equilibrium will be changed. It means that, if the equilibrium changed, the maximized profit will be changed as well. Equilibrium is the condition that, once achieved, tends to persist. It occurs when the quantity demanded of a commodity equals the quantity supplied and the market clears. For example, if the price of woods increases, the equilibrium will be changed because it affects to both supply and demand curves.

 

           In conclusion, when the government charges more taxes on cigarette, the consumption will only have a slight decrease. The number of nonsmoker will be increased which means that the people do not need to spend their money for medical check-ups regularly. On the other hand, if the number of nonsmoker increased, the government revenue will be reduced.

           

 

Bacon Shortage " Baloney." But Prices to Rise

The second article that I have chosen is about shortage of bacon meat even though the price of the bacon meat still rises. In this article, it states that drought is able to increase the price of bacon and other pork meats in the following year by 10 percent. Bacon are facing shortage difficulties due to some problems. According to the chosen article, it says that when we’re coming forward to the year 2013, the supply of pork will somewhat decrease a little.

Shortage happens when the quantity demanded happens to be higher than the quantity supplied. So in this article, consumers are facing shortage due to natural disasters that has been affecting the supply of bacon. Drought is one of the reasons behind why there is less supply in bacon. This is because drought will affect the growth of the grains that is used to feed the pigs.  The production of bacon meat will obviously decrease as the farmers will have trouble feeding them. As a result, there will be a presence of shortage of bacon. This will cause the price of the bacon to increases higher than its normal level.  

Scarcity happens when consumers wants more of a good than it is supplied. Scarcity also means the failure of a consumer to get desire. A consumer is not able to buy everything they want or need due to the low income received and also the time we have is limited. With scarcity, consumers are obligated to make choices between goods. According to the article, they mention that consumers will face a decrease in bacon supply as the year 2013 comes. This will cause scarcity to exist in the meantime as consumer will still demand for more bacon because a huge majority or people usually have bacon for breakfast, especially in hotels and consumers from the States and United Kingdom.

Price elasticity of demand can be defined as the change of price that is influenced by the demanded quantity of a good. Price elasticity of demand can be categorized into three different categories which are elastic, inelastic and unit elasticity. Elastic demand happens when the quantity demanded is high that is able to change of price of a good. However, inelastic demand occurs when the price of a good changes when the quantity demand remains constant. Whereas, unit elastic demand takes place when the quantity demanded and the change of price of a good is equal. In my opinion, inelastic demand is related with this article because even though the demand for bacon stays the same, the price of it increases.

  According to the article, bacon is sold for $4.05 but the price went down to 22cents on the week before it rises up. When the price of the bacon fell by 22cents which costs $3.83, the total revenue received will also decreases. However, when the price went back up to $4.05, the total revenue received will increase again. Moreover, the bacon has poor substitution. If a good has poor substitution goods, the more inelastic the demand is. The graph below shows an inelastic demand curve, which shows that the good has zero demand in elasticity.

 “Pork supplies will decrease slightly as we go into 2013,”,  “But the idea that there’ll be widespread shortages, that we’ll run out of pork, that’s really overblown.” (Anderson, 2012). The pork supplies will decrease due to the weather change, drought .Hence, the supply of grains will also reduce as the drought will cause the land used to farm the grains to be very dehydrated. As a result, this will also cause the cost of grains to increase followed by the cost of production pig which will also increase tremendously When the cost of production increases, the price of the bacon will also go up in the market. The graph below is based on demand and supply curve of the bacon. This graph shows the demand and supply curve before the drought happens, and also the demand and supply curve of bacon during the drought where the supply curve shifts leftwards from S₀ to S₁

 

              In this article, the price of bacon is slowly increasing in the coming year. This shows that the bacon meat does not have a price ceiling in the market. Based on my understanding, I think the government should implement the price ceiling method in to the price of bacon in the market. This is to ensure that the demand for bacon to not go over the level of an unnecessary price. If the price of the bacon is higher above the price ceiling, there will be lesser consumers purchasing bacon in the market. The graph beneath shows a price ceilings graph. The price ceiling is above the market equilibrium point where the price of the pork is not binding.       

                                                                                                                

         Hence, I hope that the market will not face any shortage in the future or present. Moreover, I think that the farmers should improve their technologies used for farming to ensure that they do not face difficulties in the future while farming their grains. As it leads to problems in feeding the pigs and hogs which will eventually lead in to problems of the pork supply.

Drug Scarcity. What Will We Do?

According to the article, (Yukhananov.A., 2012, http://www.reuters.com/article/2012/06/01/us-drugs-shortages-idUSBRE8500K220120601)  Henry Ford Hospital based in Detroit is having a drug scarcity with the usage of approximately amounting to $100 million a year, the order of supply of drugs are normally tracked by automated systems that allow for quick reorders, but the automated system are created to help the hospitals to avoid purchases and storage of unused drugs, and does not work by when the next batch of drug stock to come in. To overcome this problem immediately at the mean time, pharmacies are using the traditional way with paper spreadsheets to track the stocks. This task takes several hours each day and therefore dropping the efficiency and effectiveness of the hospital. Generic drugmakers are improving and building new facilities to prevent future shortages. Somewhat shortages happen due to the rumours spreading about shortages of drugs, pharmacies tend to rush to stock up resulting into a larger shortage of drugs.

Scarcity is defined as human wants are unlimited due to the limited resources; it restricts our options and choices toward a product as we can’t have everything we want. There are two big economic questions, which are what, how and for whom the goods and services are produced which determines how do the choices end up? And promotion of the broader social interest makes the choices that people make in pursuit of their own self-interest? As for this article, the main focus is one of the economic question is what, how and for whom? The question what, we should produce goods and services where it is the objects that human value and produce to satisfy the desire of what human wants. Goods are basically physical objects whereas services are tasks performed for people.

Based on the article, due to the growing scarcity of sterile which are one of the most important drug in the medical line. In order to maintain or increase the efficiency and effectiveness, producing more sterile in advance or extra supply would help as supply can be increase as price is held constant therefore increasing the quantity supplied to reduce the scarcity of sterile. Shifting the supply curve from S1 to S2 where the price is held constant. This would help a lot to at least stop the current issue of the shortage of sterile.

 How is the next question. using the factors of production that are grouped into four categories which are land, labour, capital and entrepreneurship. Land is known as natural resources, labojur is the work time and effort that they devote themselves to produce a certain product or services for consumers, capital are the equipments used to produce the goods and services and lastly, entrepreneurship where organization of  labour, land and capital using human resources. According to the article, the generic drugmakers like the United States- based of Hospira Inc and an Israeli company, Teva Pharmaceutical Industries said they are building new facilities, an increase in technology as well as to increase their factor of production therefore preventing future shortages of sterile. But in the mean time, pharmacies are counting pills, asking around the neighbouring hospitals for extra supplies and searching the web for any disruptions of supplies.

The graph below shows the price ceiling, where the P* shows the legal price the government has set, where MB shows the price the consumer is willing to pay at Q* which the quantity the industry willing to supply. Deadweight welfare loss occur due to MB is more than P*, whereas at P*, the quantity demanded is more than quantity supplied thus shortage occurs. The reduction of price ceiling will help reduce the blackmarket activities, by easing on the legal restrictions as well as increasing the availability of the goods.

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For whom to produce the goods and services for, based on the article, basically for the patients who can afford to pay for the drugs or for those who really need them to recover from the sickness but this is not the main problem as for now the producers are to promote to social interest as not for self-interest. Self-interest is you think of that one choice that is the best one availability of yourself. As for social interest, a choice that leads benefit to the society and two dimensions of efficiency and equity which leads to fairness to the usage of fairness. The hospital will give the drugs for the social interest, as people need the drugs to survive from the current sickness that they are going through.

Price elasticity of demand is the measurement of how responsive of the quantity demanded with the change in its price with all other influences are held constant. When the quantity demanded remains unchanged when the price changes, Edp = 0, then the good is having a perfectly inelastic demand. When the Edp = 1, the good is having an unit elastic demand. Furthermore, Edp < 1, it has an inelastic demand. Whereas when Edp >1 then it is having an elastic demand where the change in quantity demanded is more than the change in price. But when Edp = ∞, quantity demanded changes by an infinite in response to a small price change.

Products like drugs tend to have a perfectly inelastic demand because based of one the determinants which is a necessities towards sick patients, and it is a matter of life and death as well as the health of one that concerns the most. No matter how much the price increases, the people will still consume the drug as people are afraid of death and sufferings. But not only the patients, hospitals and pharmacies will buy as well to run their business and also to help the society with the supply they can get.

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In a nutshell, the shortage of drugs in Detroit has really brought quite a big issue to the country as it is a necessity to the consumers, hospitals and also pharmacies. But so far no price increase in the drugs are told or given, so consumers can just go along with the price given now but the resources of the sterile is still under scarcity. As for now the government has to find supplies as to provide aid to those who needs the drugs as to wait for the generic drugmakers to build the new facilities and able to reduce the problem with the issue of drug scarcity. 

Monopolistic competition in semiconductor industry

          Nowadays, semiconductor production technology is the most important industry for South Korea. In 1947, Bell Laboratories developed a transistor which is the beginning of D-RAM. Next, American companies dominated the semiconductor market especially Intel which is the largest semiconductor company in the 1970’s. After that, Japanese companies’ inherited the technology from America. As a result, Japanese companies dominated 75% of the world’s D-RAM in the 1980’. In 1984, Korean companies such as Samsung, LG, and so on entered the market then, Samsung held the top place in this business from 1992 until now. In the second quarter of 2011, Korean companies market share of D-RAM market was 49% in 2007, and in 2011, a 16% increased after three and a half years. It seems that Korean companies can monopolize in the near future.

 

          Recently, Samsung Electronic set a minimum price of D-RAM consistently in order to greatly surpass their competitors in the market share which is called chicken fight. The general meaning of chicken game, also known as the hawk-dove game or snow-drift game, is an influential model of conflict for two players in game theory. The principle of the game is that while each player prefers not to yield to the other, the worst possible outcome occurs when both players do not yield. However, actual meaning of chicken game in economics is that companies lower the price even they are operating at a loss. The main purpose of this game is that monopolize a market. Consequently, Samsung won this game because it has enormous financial firepower and it has highest market share among the rest companies in the market. However, as the price of D-RAM decrease again and again, everything is like the way it used to be. It means that, industry was almost same as monopoly after chicken game, but now, it becomes perfect competition.

 

          Monopoly is a firm that is the sole seller of a product without close substitute.

Monopoly in the short run

 

          This graph shows that monopoly in the short run. In this case, the intersection of the marginal revenue curve and the marginal cost curve determines the profit-maximizing quantity. The features of monopoly are different compare to perfect competition. For example, while a competitive firm is a price taker, a monopoly firm is a price maker. Besides that, monopoly is that there is no competitors, one seller and large number of buyers, no barriers to entry, and so on.

 

          On the other hand, perfect competition is a market where no buyer or seller can affect the price of the product, all units of the product are homogeneous, resources are mobile, and knowledge of the market is perfect.

 

Perfect competition in the short run

 

 

          There are many differences between the past and the present. Samsung electronics cannot discriminate prices for their products now. Last time, Samsung electronics lowered the price because they wanted to compete in price and they were confident of winning. Because of this, other companies also lowered the price. In consequence, all companies which are in the same market made a loss. After that, only a few companies which have enough money survived in the market. For instance, Hynix Semiconductor Inc. which was archrival of Samsung electronics share price declined more than 80% at that time. It means that, Samsung electronics almost dominated the D-RAM market. However, the price is almost same no matter which brand and even there is cheaper model compare to Samsung electronics now. In addition to that, there are competitors because the price of D-RAM dropped sharply. The most important purpose of chicken game was to try to monopolize in the market. However, as the cost competitive dropped, many of their competitors are going into the industry such as Hynix, Toshiba, and so on.

            Since the price of D-RAM declined, many professionals also do not know why the price is still low even there are only a few competitors now. For this reason, they guess that Samsung electronics is preparing to do chicken game again. Monopoly is a form of imperfect competition. Furthermore, monopoly is not a best way to customers because there are only limited options. In conclusion, the most significant difference between monopoly and perfect competition is competitors.

Baconpocalyse! Is it true?

In September 2012, (Tuttle, 2012, http://business.time.com/2012/09/28/so-about-that-unavoidable-bacon-shortage-you-can-stop-freaking-out-now/) United States of America faced shortage in pork and beef where it is caused by the natural disaster where the drought condition had become severe day by day. Farmers themselves understand that they have to endure with the change of weather that harms their plantation of corns. Corns are basically the feedstock for the pigs and cows, and with the price of corn rising, farmers tend to increase the price of pork and beef to cover their cost, or either way to close down the business and start something new, but how much would they increase the price?

According to the article, shortage of pork and beef is happening, but is it really happening? Well, basically pork is not facing shortage. Scarcity of supply till there is no more bacon to be found or sold, it’s impossible, because what they are really facing is the rise of price of corn crops where it disturbs the farmers to still raise the pigs with such a high cost. This will bring to the extent where too many buyers with too little supply of pork and beef which in the end causing shortage.

The drought that’s happening now has really become a big issue to the world’s corn industry as they cannot grow the corn, affecting as well the farming industry as corns are the main sources of food for the pigs and cows. In this situation, it will bring changes to the supply of pork to the market. Supply is defined as the various amounts of a good that producers are willing and able to have the availability for sale at a specific periods. It will lead to a decrease in supply as it corns are necessities to the farmers. The supply curve will shift to the left, S2 from S1. The cost of production will then decrease as the supply decreases leading the business into the diseconomies of scale. 

In every market, it will be a time when it needs to be at equilibrium knows as the market equilibrium.  Market equilibrium is the situation where the market price has reached to a certain level where the quantity demanded and quantity supplied is equal. So, in order to achieve market equilibrium, the previous market equilibrium is at point e, well the new market equilibrium is point a, on the demand curve, the point e has to move backwards which means decreasing the quantity demanded, and the supply curve to shift to the left to point a, from S1 to S2, where the supply increases. At point a, the new market equilibrium is formed. Therefore, reducing the quantity demanded and increasing price of the pork in the market to have equality among the quantity demanded and the quantity supplied. 

The measurement of how much a quantity demanded of a good is reacted to the change in price of a particular good is known as the price elasticity of demand.

Price elasticity of demand is differentiated into three types which are elastic, inelastic and unit elastic. An elastic demand is the changes in quantity demanded that the change in quantity demanded is larger than the change in price, therefore Edp > 1. Whereas, an inelastic demand is the change in quantity demanded does not hold a big responsiveness of change of price, finalizing it to the results of Edp < 1. Finally, a unit elastic demand is the change of quantity demanded equals to the change in price where Edp = 1.

The elasticity of the farmers towards the pork is an elastic demand. This is because of its availability of close substitutes. Farmers can take in for example chicken or goats where the food they eat are wheat and grass, the prices are held fixed as compared to corn as it is increasing. The quantity of the wheat and grass sold will increase drastically while the quantity of corn sold to drop drastically.

Time horizon is another determinant for the elastic demand of corn, as goods tend to have a more elastic demand over a longer period of time as it elapsed. In a situation like this, the drought may occurred at anytime is an unexpected event. The farmers had to suffer with their corn crops being affected badly. The time frame for the drought is short and lesser than a year causing the demand for corn to be elastic.

In a business, business owners care for their revenue. Total revenue is the value paid by buyer addition to the value of obtained by sellers of a good. Total revenue = Price x Quantity. In comparison with the elastic demand and the inelastic demand, the differences are that in an elastic demand the total revenue falls whereas in an inelastic demand, the total revenue increases. In other words the revenue of the farmers for corn, will decrease drastically whereas the total revenue of the substitutes increase drastically.

In conclusion, the drought that has brought havoc not only towards the country but also no benefit towards the farmers and the consumers in the market. The consumers will have to tag along with the consumers by having to pay a higher price for pork and other food prices or to go for substitutes like wheat. The research team has to find up with some technology that may enhance the watering for corn for this type of situation. Subsidies or provision of aid to the farmers by the government would really help a lot. 

Chicken Price Shoots Up !

The article (http://nation.time.com/2012/10/01/bacon-shortage-baloney-but-prices-to-rise/ ) that I have chosen is about the price of chickens that has gone up in the market. The price of chicken that has been previously set was RM7 has gone up to RM8.50. One of the reasons why the cost of chickens has risen is because of the prices of corn and soya bean has also increased. Corn and soya bean are able to affect the price of the chicken as these goods are used to feed them. Besides that, chickens are facing slow growth due to the low quality of feed.

Demands are wants that are craved by people to satisfy their never ending yearnings to get a product or a service. The amount of goods or services that is sold at a certain price at a certain time that is wanted by the consumers is called quantity demanded. Sometimes, the quantity that is demanded that is requested by the consumers cannot be fulfilled as the goods demanded exceeded the goods available. Therefore there is a presence of shortage. Based on this article chosen, corn and soya bean that has been used to feed the chicken has been increased caused the price of the chicken to also rise. Due to the rise of the cost of the corn and soya bean, the supplier has to decrease their quantity supply of the chicken as fewer consumers will purchase them due to the high price and to ensure they avoid the problem of surplus.

Quantity demanded can be measured as a quantity of a good at a time. The law of demand is when the quantity demanded is low due to the high price of a good, and when the price of a good is low, the quantity demanded rises. In this case, to relate this article with the law of demand, as the price of the chicken is high, the demand of the chicken will then be low. Therefore, there the price and the quantity demanded will have a negative relationship.

There are two effects that makes the high price of a good reduce the quantity demanded which is Substitution to effect and Income effect. Substitution effect is when other things are constant when a price of a good increases. Thus, its relative price will be its opportunity cost. Every good has its substitution, therefore when a price of good increases, the substitution good will then be an opportunity cost. If the prices of the chicken increase while other things remains constants, many consumers will turn to the second choice, for example duck, lamb and many more. Therefore, chicken will be the opportunity cost of the other chosen product. As for the income effect, when the price of a good increases, other things will also remain the same. If a cost of good rises, consumers that earn low income will not be able to afford those goods and consequently decrease their demand of a quantity. Based on this article, everything will also remain constant, price of the chicken rises then those consumers who are not so fortunate will not be able to afford these goods.

            Supply is the good or services produced by the supplier or the producer. As long as there are resources and technologies, a good or service can be produced. With supply produced, the suppliers or producers are able to make some profit. The law of supply occurs when the higher price of a good, the bigger the quantity supplied or when the price of a good is low, the lesser the quantity supplied. 

In my opinion, as s supplier, if the cost of the chicken has gone up, I’d decide to supply more chicken, without even observing the price or corn and soya. I would choose to supply more chicken due to the marginal cost increase.  Marginal cost means obtaining an opportunity cost from producing one more unit of a product. Personally in my opinion, if a price of the chicken’s production costs higher than the market’s price, I would say that it is not worth producing it as there would be cost to cover the marginal cost. Besides that, most consumers will compare prices in the market and thus not all consumers will choose to buy the chicken that is more costly.

According to the article, there are many factors that have affected the supply of the chicken. One of the factors is the food supply and the increase in price. If the price increases, the return from selling the goods will increase and therefore causes the supply to rise. Next, global warming, changes in climate and energy security has also the power to influence the supply of the chicken. Global warming decreases the supply, while good climate increases the supply of the goods. Therefore, when the supply increases, the supply curve shifts to the right, and when the supply decreases, the supply curve shifts to the left.

There are two types of price controls which are price ceiling and price floor. Price floor means legislated minimum on the price where the price of the goods cannot be lower than a certain level. On the other hand, price ceiling is when a price that is not allowed to rise above a certain level, which is the legal maximum on a price where a goods should be retailed. Price ceiling is able to relate with the article that I’ve chosen where in this article, the price of the chicken has risen from Rm7 to RM8.50. Thus, the cost of the chicken has risen up higher than the market equilibrium. Graph A below shows the prices ceiling of the chicken that is not binding. Meanwhile, graph B shows the price ceiling that is binding, where it is how the price of the chicken is supposed to be.

          

In conclusion, in order for the price of the chicken to fall, a reduction in price in both corn and soya bean should be decreased.. With this method used, I hope that the price of chicken will be stable so that consumers whether rich or poor will be able to afford buying the chicken without having to fear that the chicken price will shoot up.