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Cheap Wine the Biggest Culprit

In: Business and Management

Submitted By siwen5181
Words 1224
Pages 5
A new report says that one-eighth of Australian people drinks at dangerous level (VOA news 2007), and alcohol related social problem is more and more severe in Australia recently. Many scholars put up with the idea to levy more tax to reduce the consumption of alcohol. The article ‘cheap wine the biggest culprit’ is focus on wine consumption to illustrate the call for tax reform. This essay is to explain three questions mentioned following by the article. Specifically, it further examines the suggestion for heavy tax on alcohol concerning the elasticities of demand for alcohol. Question 1: Using the data provided in the article, calculate the price elasticity of demand for alcohol. According to Jackson, McIver and Wilson (2012, p.153), own-price elasticity of demand which is simply know as elasticity of demand is a way to measure the sensitiveness of consumers’ demand to a change in the product’s price, and the formula to calculate it is the percentage change in quantity demanded of a good divided by the percentage change in its price. The law of demand illustrates that the price and quantity demanded are inversely related verifying from the down-sloping demand curve, therefore the own-price elasticity must be negative. However, it is conventional to ignore the negative sign, and simply use the absolute form of the elasticity of demand. In this article, it shows that for a 10 percent increase in price of alcohol could have about 5 percent decrease in consumption. According to above formula, the price elasticity of demand for alcohol is 0.5 (5%/10%). Moreover, one (1) is an important value for elasticity of demand by using absolute form. If the elasticity of demand is more than 1, it shows a relatively larger change in quantity demanded for a given change in price and the product is elastic demand. While the elasticity coefficient is less than 1, it indicates a…...

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