Question

= 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]

Answer 1

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.

Step-by-step 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.