Philip+Morris+to+raise+tobacco+prices+by+6.8%+by+June+Shin

//**REMEMBER: DO NOT SUMMARIZE THE ARTICLE!!!**//

=TITLE OF EXTRACT:= Philip Morris to raise tobacco prices by 6.8%

=SOURCE:= http://www.koreatimes.co.kr/www/news/biz/2012/01/300_103838.html

=DATE EXTRACT WAS WRITTEN:= 1-31-2012

=DATE CURRENT EVENT WAS WRITTEN:= 3-06-2012

=EXPLANATION OF THE ECONOMIC THEORY RELATED TO THE ARTICLE:= The price of cigarette in Korea had raised 6.8%, the last date the price of the cigarette was changed was 2002. As the raw material cost price went up, the companies had to raise the price of the product and the increase in the tax of a sin product. The economical theory that is related to this phenomenon is supply and demand. As the materials that is required for cigarett production rised up, the company had to raise the price up.According to the law of supply as the price of a product rises, the quantity supplied of the product will usually increase, however the demand will decrease and vice versa. Due to material cost the supplier increased the price by 6.8%, and they would decrease the supply due to changes of factors of production. Due to the price fluctuation the demand will be decreased. This will set the new equilibrium point between supply and demand that both demand and supply decrease. As the supply drops the cigarette makers will try to increase the production of cigarette to lower the price but since its cigarette due to the tax this will not be possibly unless the amount of tax will change. But since cigarette is product that is considered inelastic good price shift will not result in great decrease of demand but it will show slight amount reduce in the number of sales people will still buy the product. Another reason for increase in the price of cigarette is resulted from the increased tax imposed from the government on cigarette, with the government aim of gaining high revenue and yet not cause a large fall in employment. Thus stating that raise in price doesn't result in higher revenue for the firm. Since cigarette is considered as a sin product, the producers has limited control over change of prices. And as it is a inelastic price the, most of the tax burden is passed on to the consumer.

=VOCABULARY TERMS AND DEFINITIONS:= >
 * Market- //A place or situation where buyers and sellers communicate with exchange in mind//
 * Supply- Willingness and ability for producers to produce a good at a given price over a given period of time
 * Demand-Quantity of a commodity that will be bought at a given period of time at a given price - what consumers are willing and able to buy at a price affects the demand for that good
 * Law of Supply-a higher quantity of a good will be supplied at a higher price
 * Law of Demand- states that as a price of good or service rises, the quantity demanded will fall; concurrently, if the price of a good or service falls, the quantity demanded will increase
 * Percentage tax- This is where tax is a percentage of the selling price and so the supply curve will shift.
 * Inelastic good- It is the commodity that even if price is changed the demand will not be lowered much.
 * Factors of production- land, labor, capital, management

=DIAGRAMS:=

=EVALUATION:= The government to recover the little lost of demand could subsidize the tobacco industry to lower the product, however as cigarette is a sin product the change of the price doesn't show drastic drop of demand. In short-term for the benefit government will not subsidize rather it could impose even more tax on the cigarette good to maximize the tax revenue since the demand will not going to drop when the amount of tax is increased. If the amount of tax is increased on cigarette, once again the price of the product will rised, but it will not show dramatic decrease in demand thus yielding increasing revenue for the government. In long-term the excessive amount of tax on the cigarette will result in decline in the demand, even if it is a inelastic good, in long term there will be significant decline in the number of demand. If excessive amount of tax is impose on the cigarette it could lead also impact on the cigarette industry due to decline of demand. This could might change cigarette into elastic demand then government could not impose too much tax. But possibilities of cigarette becoming a elastic good is very low, only possible if the tax rate is way to high, the consumers could not afford cigarette, where even if the consumer want to buy a cigarette they wont have enough money to do so due to excessive tax.In this case government could lower the amount of tax.So the government could impose the amount of the tax to certain extent. Most likely government will keep the constant price for the cigarette for a long-term since it enjoys the increase in revenue due to tax rate is over 100% of the product, one in a while government will raise the price.