How Prices in an Economy Are Decided

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November
3016
November
3016
Dubai International Academy
Dubai International Academy
How Prices Are Decided?
Mishaal Choudhury
Economics Report, Year 11,Mrs.Reena Tikku
How Prices Are Decided?
Mishaal Choudhury
Economics Report, Year 11,Mrs.Reena Tikku
08
Fall
08
Fall

Smoking is one of the most common causes of death and is also the most preventable form of death. Several heart diseases are caused due to excessive smoking. An average person loses up to 15 minutes of his/her life each time they smoke a cigarette. (Kapoor) Second hand smoking could also cause cancer. 3400 people die each year due to smoke from second hand smoking.(Yong) Second hand smoke is a problem at home, at work and in public areas. Smoking is not also extremely unhealthy but very expensive. The cost of smoking to a 24-year-old woman is $86,000 over a lifetime and $183,000 for a 24-year-old male smoker.(Sloan) The tobacco business is extremely profitable and is continuingly growing in revenue. However as tobacco companies such as Marlboro, Dunhill and Newport make increased profits, individuals and even whole economies lose money. This article will provide you an insight on smoking and its affect on individuals and societies and even how government can reduce the consumption of cigarettes. (Donavan)

The elasticity of demand in simple terms is how much the quantity demanded of a particular product changes when there is a change in price. A change in price could occur due to several reasons such as: 1) No substitute goods.

2) Increase in demand.
3) Company’s desire to increase profits and revenue.
4) Increase in cost of the factors of production.
5) Taxes
(Low)
Cigarettes are a highly inelastic product. The price of cigarettes is always increasing all over the world. The prices of cigarettes are almost always raised through taxation. Governments increase the price of cigarettes to discourage people from smoking. Cigarette companies will not benefit from taxes placed on their product as they will not make any increased revenue from this and only the government will benefit from the money gained on taxes. At the same time due to the increase in price via taxation, the demand falls. Recent research has shown that increasing cigarette prices reduces the amount of cigarettes purchased. Every 10 percent increase in the price of cigarettes reduces overall cigarette consumption by approximately three to five percent, and reduces the number of kids who smoke by six or seven percent. When the government places a tax on an addictive good like cigarettes, most people do not stop entirely buying cigarettes. Teenagers and young adults however are more likely to stop than people aged above thirty, as they do not usually have the money to spend on an increasingly expensive good like cigarettes. The opportunity cost of buying cigarettes for teenagers would be spending it on any other good. Because teenagers do not earn as much money as adults, they would not continue to buy cigarettes, due to heavy taxation. Still, nicotine and cigarettes are an addictive good and there is no actual substitute to switch to when prices increase. People who are addicted to cigarettes will probably not entirely stop smoking due to a change in price, making cigarettes an inelastic good. Several countries have banned smoking in public places. The first state to issue a non-smoking ban was California in 1990 and this was in restaurants. (Hanler) Researchers have found that smokers who work in smoke-free environments are more likely to quit smoking. Smoking bans may discourage people from buying cigarettes because several people may not want to smoke at home and may also not be allowed to smoke at work. Smoking bans also discourage teenagers from smoking. An alternative to smoking in public would be smoking at home, however most teenagers live with their parents and wouldn’t want to risk getting caught smoking by smoking at home. Researchers...
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