The paper "Econ Assessment" is a good example of a Macro & Microeconomics assignment. Panic buying results in an increase in price and a decrease in sales of cigarettes. It is believed that the supply of cigarettes is price elastic while their demand is price inelastic. Therefore, with panic buying of tobacco, suppliers will hoard cigarettes for fear of high production costs in the future, thus reducing supply or sales of cigarettes in the market. The artificial cigarette shortage created in the market will increase cigarette prices. The effect of panic buying can be illustrated diagrammatically as follows. The above graph shows the equilibrium price and quantity of cigarettes before the effect of panic buying.
The demand curve is price inelastic, that is, changes in price results in a small change in quantity demanded. The supply curve on the other hand is price elastic, that is, change in price results in a proportionate change in quantity supplied. Panic buying reduces the supply of cigarettes, thus shifting the supply curve inwards, from S to S1 as shown below. From the graph, the shift in the supply curve sets a new equilibrium at E1, price on the other hand increases from P to P3 and quantity reduces from q to q1.
Therefore, panic buying increases the price of cigarettes to P1 and decreases sales to q1. Crackdown on internet advertising of cigarettes reduces the price and sales of cigarettes. It is believed that a crackdown on internet advertising of cigarettes is a strategy designed at decreasing the amount of cigarette demanded at any given price. The effect of internet advertisement restrictions on sales and the price of cigarettes can be illustrated as follows. From the above graph, restriction on internet advertisement causes the demand curve to shift from D to D1, thus changing equilibrium price and quantity.
The inward shift of the demand curve reduces equilibrium price to P1 and the equilibrium quantity to q1. Sales or supply of cigarettes decreases from q to q1. Therefore, a crackdown on internet advertisements reduces the price and sales of cigarettes. Question two The burden of the new tax will be borne more by consumers. Inelastic demand and elastic supply are some of the features that define the cigarette industry.
Elasticity and tax burden go hand in hand, that is, if supply is elastic and demand elastic, the tax burden will fall on producers.
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