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It concludes that in a competitive market, price will function to equalize the quantity demanded by consumers, and the quantity supplied by producers, resulting in an economic equilibrium of price and quantity.
The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product.
Elasticity Elasticity is a central concept in the theory of supply and demand. In this context, elasticity refers to how strongly the quantities supplied and demanded respond to various factors, including price and other determinants. Elasticity is calculated as the percentage change in quantity divided by the associated percentage change in price. For example, if the price moves from $1.00 to $1.05, and as a result the quantity supplied goes from 100 pens to 102 pens, the quantity of pens increased by 2%, and the price increased by 5%, so the price elasticity of supply is 2%/5% or 0.4.
If the quantity changes by a lesser percentage than the price did. If supply is perfectly inelastic. has zero elasticity. If the quantity demanded or supplied changes by a greater percentage than the price did. One of the most common to consider is income. then demand or supply is said to be elastic. demand or supply is said to be inelastic.that is. Another elasticity sometimes considered is the cross elasticity of demand. which measures the responsiveness of the quantity demanded of a good to a change in the price of another good. This is often considered when looking at the relative changes in demand when studying complements and substitute goods… Page 2 . Elasticity in relation to variables other than price can also be considered..Managerial Economics case study (1) Since the changes are in percentages. changing the unit of measurement or the currency will not affect the elasticity. How strongly would the demand for a good change if income increased or decreased? The relative percentage change is known as the income elasticity of demand.
Based on the empirical results of the paper .A study on 30 developing counties has found that both Page 3 .Managerial Economics case study (1) 1.are advertising bans (both limited and comprehensive ) effective in controlling consumptions of cigarettes in developing countries ? Discuss. (Y) Price of Cigarettes Due to a decrease in adrevertising D1 D2 Quantity of cigarettes (X) Tobacco control advocates and practitioners argue that tobacco advertising has a positive impact on aggregate consumption and that restricting and even banning tobacco advertising has a positive impact on aggregate consumption and that restricting and even banning tobacco advertising altogether can reduce aggregate consumption comprehensive advertising bans have played a role in reducing consumption in developed countries but that limited policies have not .
As a result .countries that implemented limited and comprehensive bans found consistently declining consumption over the period while countries that kept weak bans in place found that consumption consistently rose .Managerial Economics case study (1) comprehensive as well as limited policies are effective in reducing consumption although comprehensive bans are more powerful than limited ones .What you conclude about the price elasticity of demand and income elasticity? Explain the effect of price and income changes as demand determinants on cigarette consumption Income elasticity of demand is used to see how sensitive the demand for a good is to an income change. it finds that advertising bans may be even more effective in the developing world than they are in developed world . Limited bans reduce per capita consumption by 13. the more sensitive demand for a . It is important to notice how countries that changed to limited and comprehensive strategies were more than likely high income countries and those that kept weak policies in place developing countries .5%reduction in per capita consumption(relative to the base case of a weak policy regime).countries which implemented more restrictive advertising regimes were more likely to have another policies in place which discouraged smoking such has higher taxation(and price)… 2.6%while comprehensive bans result in a larger 23. The higher the income QX d = α0 +αX PX +αY P +αM M +αH H Y Page 4 elasticity.Further more .In addition.
py .Y per capita real income .P real price .and H are demand shifters.respectively and the subscript (it) refers to country i and time period t .2%reduction in per capita consumption . M. D(Comp) represent the dummy variables for limited and comprehensive bans . a log-linear specification might be appropriate if the quantity demanded is not linearly related to the explanatory variable : ln Q X d = β0 + βX ln PX + β Y ln PY + β M ln M + β H ln H In the recent question . The absolute magnitude of price elasticity is relatively low indicating that 10% increase in the real price result in only a 1. e is the dandom error term that has a zero Alternatively.This result is somewhat unexpected and not consistent with what is found in the literature .It Page 5 .Managerial Economics case study (1) good is to income changes. For the case of a linear demand relation . and mean. The price elasticity is negative and statistically significant and consistent with our expectations that tobacco is price inelastic and a normal good . one might specify the demand function as Where ‘s are the parameters to be estimated .the static model is estimated in natural logarithms to allow for interpretation of the coefficients and is formalized by the following equation : Ln Cit = 0+ 1 ln Pit + 2 ln Yit + 3 D(Comp) it + µit Where C represented per capita consumption .
initiation .0% increase in per capita consumption and is in line with what the literature suggests we should expect.illicit trade .cessation and the type of tobacco(Chaloupka et al. Table Results of the econometric models Model constant lnP R^2 lnY D(lim) D(comp) Page 6 . The high level of aggregat6i9on8 redu9ces our ability to control for many important effects including the interaction between demand and supply . Y Initial line M1/Py Mo/Py line M2/Py M/pox M2/Px Y M/Py Increase in consumption New budget Decrease in consumption X X Mo/Px M1/Px M/P1x Increase in the price of cigarettes Changes in income Shrink or expand opportunity The absolute magnitude of the price elasticity is relatively m .Managerial Economics case study (1) suggests that the impact on consumption of an increase in price is far smaller than expected ..2000). The income elasticity indicates that a 10% increase in per capita real income will result a 1.There are a number of reasons why this is the case although the high level of aggregation of the data might be to blame .
the second part will focus exclusively on developing countries.235(. Blecher Page 7 .6 million people die per year due to the negative impact of smoking. This trend can be seen in many parts of the world.97 -0.6% and comprehensive bans by 6. In the following it will be explained under which circumstances pricing policies or advertisement bans have a greater impact on cigarette consumption. *** 3. Furthermore. Dependent variable is ln C Significant at 1% **Significant at 5% and * Significant at 10% . a number of 2 million affected people is projected. tax increases) be more effective than advertising bans for cigarette consumption? Elaborate your argument.0. limited bans reduce smoking in developed and developing countries by 2.928)*** 0. 2003).512)*** 0.830)* Developing countries OLS Di 0.745)*** -0.026(-0.4. Whereas the first part is dedicated to all countries.434)*** Di and Dt represent country and time effects included in the model .067(-1.040) -0.2. According to Blecher (2008). For 2020. However.086(1.0. smoking of cigarettes is a major cause of preventable premature death in the world.5439(6. For instance.709) .123(-4. Would cigarette pricing policy (say. in Europe 1.Managerial Economics case study (1) All countries OLS Di & Dt 5.7%.192 (1. some countries have managed to decrease smoking by advertising policies and / or pricing policies (WHO.999)** -0.199)** .96 0.136(.099(-2. Nowadays.
However. They suggest that a 10% increase in the cigarette price results in 2. it clearly be said if a 10% tax increase of cigarette price or limited and / or comprehensive bans have a greater impact on the consumption of tobacco. resulting in significant reductions in per capita consumption of tobacco (WHO. This approach was taken by some European countries which raised taxes on cigarettes by 70%–80%. an empirical research of Chaloupka and Warner (2000) shows that the price elasticity of tobacco products might be higher. In comparison.5 – 5. According to Blecher cannot in Page 8 . The picture changes if only developing countries are considered.0% reduction per capita consumption.100% instead of 10%. Hence. if the excise tax increases by 70.2% reduction of per capita consumption (see Figure 4). considering all countries and both empirical studies. 2003).Managerial Economics case study (1) demonstrates that a 10% increase in the real price of cigarettes results in a 1. the impact on cigarette consumption is definitely greater than the impact of advertisement bans in developed and developing countries.
It seems to be that advertising bans are much more effective in developing countries than in developed countries. According to the WTO (2003).6% and comprehensive bans by 23. limited bans reduce smoking in developing countries by 13. limited and comprehensive bans are more effective than a 10% tax increase of cigarette products. In the special case of developing countries. a stronger increase of taxes on tobacco products leads to a more powerful decrease of tobacco product consumption. It can be summarized. that a low (10%) tax increase in developed and developing countries has a similar effect on cigarette consumption than advertising bans. However. a comprehensive approach.5%. combining tax increases and advertisement bans. the 10% increase in tobacco products has a relatively low impact on cigarette consumption (compare Figure 5).Managerial Economics case study (1) (2008). In comparison. a greater increase of taxes on cigarettes would overcome the effect of limited and / or comprehensive bans as well. is the most powerful technique to reduce cigarettes consumption. Page 9 . However.
while warnings are only statistically significant in the first sample period while the advertising restriction score is not statistically significant in any of the samples. The t-statistic also falls over the three samples indicating that advertising restrictions have become less important in determining consumption.Managerial Economics case study (1) 4. Nelson (2003) uses the fitted values for the advertising restriction score as an instrumental variable in estimating tobacco demand. Nelson (2003) concludes that advertising bans and restrictions have had no effect on consumption although the final model he presents does Page 10 . In order to test the endogenously of the advertising bans. Although not statistically significant the coefficients are negative in all samples. a Hausman test was performed which failed to reject the null hypothesis that advertising bans were exogenous. indicating that the two stage model is important in explaining the relationship between the political economy and advertising bans and their relationship with consumption. which are inconsistent with the results Nelson (2003) found in the single equation models.developing countries depends on literature view and data analysis Economists have added much value to this debate with many studies showing that advertising has had a positive impact on aggregate consumption.Why do you think the author concludes that the impact of advertising bans are more effective for controlling cigarettes consumption in developing countries than developed countries ? The author concludes that the impacts of advertising bans are more effective for controlling cigarette consumption in developed than .7 Nelson (2003) finds that income and prices are statistically significant in predicting demand.
effect on consumption. Moreover for one the literature indicates that the impact of price change has a large impact on consumption in developing countries via-a-vis developed countries.p. albeit insignificant.80)indicates that “the consensus view is that the price elasticity of demand is a round -0. firstly the price of cigarette takes up a greater portion of a consumer’s income in the developing world than in rich country (Blecher and Van Walbeek. public smoking bans and social factor. 2004).4developed countries and between -0.Thus as a result an increase in price has a relatively greater impact on a person’s relative budget.Karim Sp21035 Ibrahim saleh omar rababah Sb21088 Page 11 .8 for developing countries” farther more. There are a number of reasons for this greater sensitivity. consumer in poorer countries are likely to have lower education levels and thus have a poorer understanding of the health consequences of smoking.Managerial Economics case study (1) suggest that this is not the case and that in fact.Thus it can be said that tobacco demand is more sensitive to its determinants in the developing world relative to the developed world.4and -0. changes in income also have a great impact on consumption in the developing world than the developed world . Farther more. By Haitham A. Whether it be price increases as result of tax increases or non-price measure including advertising bans. VanWalbeek(2005. Thus the impact of advertising may be weaker in high income countries since a fewer number of smoker are enticed by advertising due to the better understanding of the health consequence. advertising bans and restrictions have had a very small. Consumers are more sensitive to demand sided intervention.