Cigarettes Price Increase!

BAT Malaysia announces cigarette price increase of 20sen from Monday

http://thestar.com.my/news/story.asp?file=/2012/10/21/nation/20121021213418&sec=nation

http://www.havocscope.com/cigarettes-sold-on-the-black-market-in-malaysia/

Summary

From the article, it tells us that there is a hike on price of cigarette. According to British American Tobacco Malaysia (BAT Malaysia) has announced that there are a 20sen increase on the prices of all cigarette packs and it will be effective soon.  Based on William Toh which is the managing director of BAT Malaysia, the changes of price on cigarette is because of the excise and sales tax payable has increased.

Opinion

The world’s view nowadays on smoking cigarettes has changed dramatically over the last century. This habit considered to be cool or sexy for the generations nowadays. Many people are widely enjoyed on smoking cigarettes. Although smoking is also considered to be a nasty addictive habit that can kill, but smokers still increasing year by year.

In my opinion, the article approve to the concept of Law of demand. Law of demand is the quantity demanded will change when the price is changing and other factors are all remain unchanged. As the price of cigarette is rising, the quantity demanded of cigarette is decreasing because the willingness for people to purchase it more is has decreased and also because people might not be able to afford. It is an inverse relationship between price and quantity demanded. Based on the graph below, smokers are not willing to purchase more cigarettes had decreased. Thus, the quantity demanded of cigarettes had decreased. Other than that, suppliers are more willing to supply more cigarettes when the price is higher because suppliers can earn more profit from it. So, quantity supplied of cigarettes increases.

 Besides that, complements goods of cigarettes will also affected by the changing of price on cigarettes. The complements goods of cigarettes which is lighter will decreases if the price of cigarettes increases. Thus, people wouldn’t buy lighter as if they don’t have cigarettes. When the quantity demanded of cigarettes goes down, there will be a substitute effect and income effect. Smokers find other goods such as Tobacco plant to satisfy their wants.  Tobacco plant is the replacement goods for cigarettes. Other than that, income effect is when the price of cigarettes increases but smoker’s income remains unchanged, smokers might not be able to afford to purchase as much as they bought previously. Smokers will decrease the amount they bought previously and cause the quantity demanded of cigarettes decreases.

            If the expected future price of cigarettes increases, the smokers will protect their benefit by purchase more on cigarettes while suppliers will produce lesser on cigarettes. Thus, the demand on cigarettes increases while the supply on cigarettes decreases. There will be changes in demand and supply. In the other words, the demand or supply curve would either shift to the left or right influenced by the factors. For example, if suppliers of cigarettes can expect the future price of cigarettes will be increase, the supply curve will shift to leftward because there is a decrease in supply while the demand curve will shift to rightward because there is an increase in demand.

Other than that, this situation is in price elasticity of demand. Price elasticity of demand occurs when the percentage change in the quantity demanded is less than the percentage change in the price. There are few factors that influence the elasticity of demand. First of all, the closeness of substitutes. The closer the substitute for a good or service, the more elastic is the demand for it. It means the closeness of substitutes for cigarettes will affect the price elasticity of demand curve. For example, the smokers that cannot afford to purchase cigarettes as the price goes up can purchase tobacco to replace the cigarette. The income effect will not affect the elasticity of demand curve of cigarettes because smokers are willing to purchase cigarettes. Thus, the quantity demanded of cigarettes will not be affect too much.

            As the price of cigarettes goes up, the suppliers will produce more and the smokers will purchase lesser. It means that the supply goes up while the demand goes down as what I mentioned. Thus, it will cause the market failure and deadweight loss will rise. Market failure is the markets do not always achieve an efficient outcome. Back to the article, the suppliers will produce more cigarettes and it might cause a market failure in cigarettes market. Overproduction of cigarettes and the selling rate is not that fast cause a surplus. Therefore, the suppliers of cigarettes will lose profit.

            In conclusion, the government is using the concept of price floor to control the market. Cigarettes harm human’s health and bring so much disadvantage to us, so government always wanted to control the people to smoke lesser. When the government set the price floor, sellers will not sell it lower than the price floor, because it is illegal. It means that the price of cigarettes will be pull up by government and the quantity demanded for it will be decreases. There might be some smokers cannot afford to buy as much as they bought previously, so it causes a fall on quantity demanded of cigarettes. Although government did pay attention in the pricing of cigarettes, but black market still occurs. In 2010 and 2011, the rate of cigarettes sold on the black market in Malaysia was estimated to be at 36.6 percent of all cigarettes sold. The illegal arrangement is made between buyer and sellers. Thus, government can really get to control the market when the black market occurs in Malaysia.