Question

61 Analyze and comment on the "You're The Economist" box on page 140. How does the elasticity of demand for tobacco products differ for children versus adults? How can government use this difference? Please post your main answer and two comments on two different days.

Answer 1

Generally elasticity of demand for tobacco products is inelastic ie. e<1. This is habitual commodity, change in price of tobacco products generally not much effects on it's demand. So tobacco products is exception to law of demand.

In case of children, elasticity demand for tobacco products is less elastic. Because purchasing power of children's comparatively low as compare to adults and less willingness to spend more on single commodity. Children's are much responsive when price get changed of tobacco products.

And in case of adults, elasticity of demand for tobacco products is inelastic, ie. e<1. Adults don't response much, when prices change for tobacco products. Because of there addictiveness towards tobacco products and more purchasing power than children's, they will spend more.

Government can use this data to resist & prevent children's from consuming tobacco products, ie. Imposing higher tax rate on such products. Levying higher rate of tax will increase Price of product, which could ultimately reduce purchasing power of children's.

Government can also use such data to generate more public revenue collection, by imposing higher tax rate on such commodities.

Assuming;

Day 1: Low tax rate, Lower price of tobacco products, more will be consumption of tobacco products by children's.

Day 2: Higher tax rate, Higher the price of tobacco products, less would be consumption of tobacco products by children's, subsequently more would be tax collection, will generate huge public revenue.

This policy is actually good for economy which can generate higher revenue and can resist children's from consuming of tobacco products.