Keith Siilats R11
a. Real prices are prices that are calculated relative to base year taking account the inflation. E.g. when the inflation is 5% per year and base year is 1966 then when good costs £105 then its real price is £100.
So when there is downward drift in real prices then it means that price rises less than inflation rate, in that case it means that cigarette prices are rising, but the costs of other goods are rising more quickly, so it's relatively cheaper to buy cigarettes.
b. (i) PEofD=
So 20/26= 0,77
(ii) 1. A number of campaigns have been made against cigarettes, which have decreased the demand, they have not been taken account.
2. It is pretty hard to calculate the exact inflation because cigarettes are mostly bought buy poorer people, then e.g. their demand is not influenced by car prices, but when the car prices rise, the inflation rises, so the real prices get smaller, which gives a wrong estimation.
3. The population could have changed, the price of lighters might have gone up etc.
(iii) The people in higher socio-economic group did not decrease their consumption after tax was increased (so price increased). That means they had inelastic demand.
The people in lower socio-economic group decreased their consumption after the price rose, so unlike higher socio-economic group, they had elastic demand.
c. The demand for cigarettes were inelastic so the demand and supply graph will look like:
After the imposition of tax the supply curve moves upwards by the amount of tax, because supplier gets then the amount which it did before and government gets the rest. This is shown below:
The biggest effects were the fall in quantity and increase in Gov. tax revenues.
d. 1. Because the demand is inelastic Gov. can impose high taxes, because quantity does not change so much, so it can get high revenue and built e.g. schools and hospitals, provide social goods (roads) etc.
2. Less people buy cigarettes and that is good, because cigarettes destroy health.
3. Empty cigarette-packs also pollute the environment, Gov. can clean it with tax money and less pollution is made when less cigarettes are bought.
4. Smoking also affects non-smokers' health. Again with that tax money Gov. could give then treatment and when fewer tobacco products are used fewer people get ill and Gov. can use this money for other purposes.
5. Tobacco is grown in land were other food can be grown. As the food is scare in many third-world countries, then when less tobacco is planted more food can be planted and people do not have to be hungry anymore.
6. Tobacco planting requires a great deal of man-power. The work is usually hard and badly paid. When Gov. imposes taxes and supply decreases those people can do something useful and more healthy.
7. Because tax gives a big income to Gov.(10%) it can decrease other taxes (e.g. vat, income and corporation tax). This will encourage other industries and economic growth will take place.
8. There is usually crime attached to tobacco business. By decreasing this business crime will decrease and people can live in peace.