The Tobacco Industry: A Case Study

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To determine which one of the two goods would be preferable in terms of total amount of tax revenue that would be collected, we need to determine the elasticity of the two goods. Elasticity is a tool that measures the reaction of quantity demanded to a change in price of good (Parkin, 2010) (Parkins et al. 2013:75-76). If elasticity price is less than one, therefore the good is inelastic. However, if the elasticity price is greater than one, the good will be regarded as elastic.
Determine D good 1 (Petrol) elasticity level
Determine % change in quantity
%ΔQ=(Q1g1-Q0)/((Q0+Q1g1)/2)×100= (35-40)/((40+35)/2)×100= (-5)/37.5×100= 13.33%
Determine % change in price
%ΔP=(P1 good 1-P initial)/((P initial+P1 good 1)/2)×100= (18-10)/((10+18)/2)×100=
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The Tobacco industry is impacted by the following factors: Increased Health regulations and health awareness of consumer Increasing excise tax and prices so consumers look for cheaper substitutes Substitutes for the byproducts of tobacco such as e-cigarettes
According to Parkin (2010), the below table identifies the four Market Structures that exist in an economy along with their key characteristics:
Market Structure Characteristics
Perfect Competition Many firms, Free/easy access to enter and leave market, Firms are “price takers”, Firms all sell identical products and Consumers are well informed of market offerings
Monopolistic Competition Many Firms, differentiated products, Low barriers to entry, Firms have some influence on price and Firms have low market share
Oligopoly Few firms control majority of market share, High barriers to enter market
Firms are price makers and Products may be identical or differentiated
Monopoly One firm, No close substation to product, High cost and barriers to entry, Firm is price maker (Parkin et al.2013:221;223)
The Tobacco Market can be categorized within the Oligopoly Market structure due to the following attributes: Few Firms control the Tobacco market
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This could inhibit entrants if production costs are too high Advertising and packaging regulations: Tobacco products have laws that govern advertising and packaging. This limit new entrants developing brand awareness and allows producers already in the market to keep brand loyalty from their clients Price Makers: As few producers in the market control a large market share, the producers are able to highly influence prices through their influence on purchasing input production resources, and as well as collusion in pricing Products may be identical or differentiated: These products are individually differentiated by branding, product quality and
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