what is the impact of cigarette taxes on Some people say.It’s so people will pay anything for their daily weeds.” Economist look to the price elasticity of demand to answer this question.
An Interference experiment took place in New. which doubled Its cigarette tax from 40 cents to 80 cents per pack. In 1998.This tax Increase pushed the ave-rap price of cigarettes from $2.40 to $2.80 per pack. , Economists estimate that, after correct-inc for trends In consumption and sales from neighboring states. cigarette consumption decreased front 52 million to 47.5 million packs.
Using the elasticity formula. you can calculate that the short-of’ elasticity Is 0.59. (Make sure you can Jet the same number.) Similar estimates come from more statistical studies. The evidence Indicates, therefore, that the demand for cigarettes Is in-elastic In the short run but definitely responds to cigarette prices.
PRICE ELASTICITY OF SUPPLY
Of course, consumption is not the’ only thing that changes when prices go up or down. Businesses also respond to price in their decisions about how much to produce. Economists define the price elasticity of supply as the responsiveness of the quantity supplied of a good to its market price.
More precisely, the price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price.
As with demand elasticities, there are polar Ernestine of high and low elasticities of supply. Sup the amount supplied ‘is completely fixed, as in case of perishable fish brought to market to be old at whatever price they will fetch. This is the case of zero elasticity, or completely inelastic suppl , which is a vertical supply curve.
At the other extreme, say that a tiny cut in price will cause the amount supplied to fall to zero, the slightest rise in price will coax out an large supply. Here, the ratio of the percentage change ill quantity supplied to percentage change in price is extremely large and gives rise to a horizontal supply curve. This is the polar case of infinitely elastic supply.
Between these extremes, we call sup ply elastic or inelastic depending upon whether the percentage change in quantity is larger or smaller than the percentage change in price. In the borderline unit case, where price elasticity of supply equals I. the percentage increase of quantity supplied is exactly equal to the percentage increase in price.
You can readily see that the definitions of price elasticities ‘of supply are exactly the same as those for price elasticities of demand. The only difference is that for supply the quantity response to price is positive. while for demand the response is negative.
The exact definition of the price elasticity or supply, H~,is as follows: .
Figure 4·6 displays three important cases of supply elasticity: (a) the vertical supply curve, showing
When supply is fixed. supply elasticity is zero, as in curve (a), Curve (c) displays an indefinitely large quantity response to price changes. Intermediate case (b) anuses when the percentage quantity and price changes are equal.
completely. inelastic supply; (c), the horizontal supply curve, displaying completely elastic supply; and (b). an intermediate case of a straight line,going through the origin, illustrating the borderline case of unit elasticity .
What factors determine supply elasticity? The major factor introducing supply elasticity is the ease With which production in the industry can be increased. If’ . all inputs can be readily found at going market prices, as is the case for the textile industry, then output can be greatly increased with little increase in price. This could indicate that supply elasticity is relatively large. On the other hand, if production capacity is limited, as is the case for the mining of South African led, then even sharp increases in the price of gold call forth but a small response in production of south African gold; this would be inelastic supply.
Another important factor in supply elasticities. is e lime period under consideration, A given change You ran determine the elasticity of a supply curve that not a straight line as follows Draw the straight line that lie,tangent to the curve at a point, and (b) then measure the elasticity-or that tangential ‘straight line.in price tends to have a larger effect on amount supplied as the time for suppliers to respond increases.For very brief periods after a price increase, firms may be unable to increase their inputs of labor, materials. and capital, so supply may be very . However, as time passes and businesses can hire more labor, build new factories, and expand capacity,supply elasticities will become larger.
We can use Figure 46 to illustrate how supply may change over time for the fishing case. Supply curve (a) might hold for fish on the day they are brought to market; where they are simply auctioned off for whatever they will bring. Curve (b) might hold for the intermediate run of a year or so, with the given stock of fishing boats and before new labor is attracted to the industry. Over the very ‘long run, as new fishing boats are built, new labor is attracted, and new fish farms are constructed, the supply of fish might be very price-elastic, as in case (c) in Figure 46 .
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