Price Elasticity Of Demand Essay

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Charlotte Keelan 9 May 2014 Economics The over consumption Alcohol is a price inelastic good, meaning that changes in price for the good do not affect the demand, also meaning that consumers are likely to easily find substitutes if just one . The market for alcoholic beverages is monopolistically competitive, meaning there are many firms in the industry, all producing relatively similar goods. The combination of these two means that policy makers have a range of mechanisms available to influence consumer behavior and curb consumption. Demand and price elasticity of demand are very important in relation to the consumption of a good (Why? Explain). The price elasticity of demand for alcohol overall is highly inelastic, meaning that the percentage change in quantity demanded is less than the percentage change in price (Hubbard et al. 2012). For the alcohol market as a whole, any price change on alcohol will have a very small effect on the quantity of the good demanded. Within the alcohol market, each type of alcohol (sub-types) has different elasticity, as there is likely to be a number of close substitutes. Demand of inferior alcoholic products, such as ‘alcopops’, which are mainly consumed by young adults and teenagers, falls when the price of these products rises as they no longer become affordable and readily available. Although, with a rise in the price of cheaper alcoholic beverages and a fall in demand for these goods, there tends to be a rise in demand for other beverages, such as spirits and sodas for mixing, despite spirit generally being considered luxury goods (need to explain this better). Policy makers need to consider the pricing and demand implications when considering method to curb consumption of alcohol. Therefo... ... middle of paper ... ...me for price floors as a higher price in a price floor is also unlikely to affect those goods which are inelastic. As previously stated, taxes are also likely to result in higher consumption of those goods which are substitutes for the goods being taxed. This can be seen in an increase in consumption of spirits, soda, wine and beer when a tax on pre mixed alcoholic drinks was introduced. With both price floors and taxes there is a loss in economic efficiency as some people win, while others lose. Price floors also cause the marginal benefit of the last unit produced of the good to be greater than the marginal cost of producing it, this is represented by the dead weight loss. This is also a representation of the reduced surplus caused by the price floor. Therefore, the policy makers chose to use a price floor over a tax as taxes often have redistribution effects and

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