High School

= 0.75

15%

1900

Source material: Discouraging smoking in Australia

Smoking causes a range of health problems including lung cancer, heart disease, stroke, chronic

bronchitis and emphysema. It also generates a number of external costs, including passive smoking

and air pollution.

Demand for cigarettes is inelastic, although the degree of price elasticity of demand has changed

slightly in recent years. This is because of the increased popularity of electronic cigarettes, first

introduced in 2003, and the rise in the price of cigarettes. The supply of cigarettes is also inelastic,

although less so than the demand. In 2016, it was estimated that the price elasticity of supply of

cigarettes was 0.75.

c

The Australian government takes some of the harshest measures to discourage smoking. It bans

smoking in public places, workplaces, restaurants and vehicles carrying children. Some local

councils also ban smoking on beaches and sports grounds. Large fines are imposed on those who

break the bans. The 2011 Tobacco Plain Packaging Act requires cigarettes to be sold in packets

that are plain apart from health warnings. The government has also been increasing the tax on

cigarettes. Between 2012 and 2016 the tax rose by 12.5%.

The increase in tax is the main cause of the rise in the price of cigarettes in recent years.

Table 2.2 shows how the price of cigarettes and the demand for cigarettes have changed in

recent years.

Table 2.2: The average price of a packet of 25 cigarettes and demand for cigarettes in

Australia, 2012-2016

Year

2012

2013

2014

2015

2016

Average price of a packet of

25 cigarettes in Australian dollars

17.00

18.75

21.30

23.65

26.18

21 200

21 350

20 900

19 242

18 656

Smoking is declining in Australia. In 1977, 37% of the adult population smoked. By 2016, despite

a rise in incomes, the percentage of the population who smoked had fallen to 13%. A higher

proportion of the poor smoke than the rich. This is thought to be linked, in part, to the greater

stress experienced by the poor.

4 Referring to the source material in your responses, answer all parts of Question 4.

a

Does the Australian government believe cigarettes are over or under-produced?

b Explain what evidence there is that cigarettes are an inferior good.

!

Demand for cigarettes (millions)

TIP

Bring out the meaning of an inferior good in your answer.

over-produced

[1]

[2]

Calculate the percentage change in quantity supplied that would occur if the price of

cigarettes rose by 20%.

d. Explain two reasons why the demand for cigarettes has become less inelastic

in recent years.

[2]

[4]

0 75 15 1900 Source material Discouraging smoking in Australia Smoking causes a range of health problems including lung cancer heart disease stroke chronic bronchitis

Answer :

Final answer:

The Australian government uses various measures to combat smoking due to its health implications and inelastic demand. A 20% price increase would lead to a 15% increase in quantity supplied, while youth smoking is more responsive to price changes than adult smoking.

Explanation:

Given the inelastic demand for cigarettes, the Australian government's efforts to discourage smoking through policies such as anti-smoking advertising, the Tobacco Plain Packaging Act, and taxation can indeed reduce smoking rates. The price elasticity of supply for cigarettes in 2016 was estimated at 0.75, indicating that supply is somewhat inelastic as well, though less so than demand. This means that price increases lead to a less than proportionate increase in the quantity supplied.

Increasing cigarette prices by 20% would result in a percentage change in quantity supplied, which can be calculated using the price elasticity of supply formula: percentage change in quantity supplied = price elasticity of supply * percentage change in price. With a price elasticity of supply of 0.75, a 20% price increase would lead to a 15% increase in quantity supplied.

The demand for cigarettes has become less inelastic in recent years due to factors such as the availability of electronic cigarettes and higher cigarette prices. Moreover, youth smoking is more elastic than adult smoking, meaning that a percentage increase in price leads to a greater percentage reduction in quantity demanded among youths.

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