INTRODUCTION

Microeconomics means the study of the behaviour of individual economic units. It studies the supply and demand in markets for particular goods and services and the resources, by examining the economic behaviour of firms and consumers.

A cigarette is a small paper-wrapped cylinder of cured and shredded or cut tobacco leaves processed with hundreds of chemicals. The cigarette is ignited at one end and allowed to smoulder for the purpose of inhalation of its smoke from filtered end, inserted in mouth. They are manufactured by a machine, and are the predominant form of tobacco used worldwide.

In Malaysia, cigarette smoking is the extreme avoidable cause of disease and untimely death in our nation. Secondhand smoking causes frequent lung cancer deaths annually. Measures have been taken in both workplaces and public places to limit exposure to secondhand smoke. Smokers around our country are likely feeling a great deal of angst. A pack of 20s will be priced at rm10 starting today (THE STAR, 2010). The previous price at 2009 was RM9.30, and now priced 70cents higher than previous. A price increase is a good opportunity for smokers to kick the habit, adding that the ministry has set up clinics to help smokers quit free of charge (Health Minister Datuk Seri Liow Tiong Lai, 2010). Locally, there are estimated to be more than 100 types of smuggled cigarettes, priced between RM3 and RM3.50 for a 20-stick pack. He also suggested that cigarette smuggling activities might see an increase.

Malaysia government had realized that the consumption of cigarette in the country was so high and the government had decided to increase 10% tax on the tobacco. This will directly affect the price of tobacco, which will lead to the increase on price for cigarette. According to the information from the given article, an increase of 10% on tobacco will reduce 3.8% of consumers demand on cigarette. Besides that, the government had also ordered that it is a restriction for any promotion made on cigarette and there is an age limit for purchasing cigarette. The government used all these methods by hoping to further reduce the consumption of cigarette in Malaysia.

MAIN BODY

Explain price elasticity of demand. Calculate the price elasticity o demand for cigarette and use a diagram to illustrate your answer.

Price elasticity of demand is a measure of the responsiveness of quantity demanded to a change in price. In other words, it is ration between a change in price and the resultant change in quantity demanded. There are two method used to calculate the degree of elasticity.

The first method is The Point Method. The formula for The Point Method is:

Ed = Q ÷ P

Q P

The second method is The Arc Method. In other words, The Mid-point Method. The formula for The Arc Method is:

Ed = Q ÷ P

Q1 + Q2 P1 + P2