Saturday, October 27, 2012

Will people continue to buy beer although the price of beer increases?





          Naivasha-based Keroche Breweries has warned that the new alcohol tax order by Finance minister Njeru Githae is likely to impact negatively the alcohol sector.According the company’s CEO Tabitha Karanja, the new order by Githae for a quarterly review of alcoholic drinks prices will increase beer prices. 

          The law of demand states that the higher the price of a good, the smaller is the quantity demanded. The law of demand results from two effects which are substitution effect and income effect. For the substitution effect, I believe that there is no substitute for those people who are really addicted to it. But however, for those people who are not really addicted to it and they feel like quit drinking, they can try to drink carbonated drinks instead which saves their money too. Hence, when the relative price of the beer rises by leaps and bounds, people will seek substitutes for it, so the quantity demanded of the beer decreases. While for the income effect, people from low end or middle end family cannot afford to buybeer when the price of beer increases and therefore the quantity demanded of beer decreases. There are six main factors that change demand which are the prices of related goods, expected future prices, income, expected future income and credit, population and preferences. If the expected future price of beerand future income and credit increases, current demand for beermight also increase because people will buy lots of them and keep them before the price increases so that they will not face any loss. Besides that, beer is considered as a normal good hence the demand of beer increases as income of people increases. However, if the price of beer increases, the demand of beer will slightly decrease and the producer of beer will not face shortage of supply due to low end and some middle end family might not afford to buy beer. Equilibrium in a market occurs when the price balances the plans of buyers and sellers. From what I see, I predict that if the price of beer increases, there will be no shortage of beer and therefore equilibrium can be achieved since quantity demanded and quantity supplied are equal.

          The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same. From my point of view, I felt that the price elasticity of demand on beer is elastic because if the price of beerincreases, less people will consume beer except those who are addicted to it. The total revenue from the sale of beer equals the price of the beer multiplied by the quantity sold. The change in total revenue due to a change in price depends on the elasticity of demand. Hence, the total revenue of beer decreases as the demand of beer is elastic. As beer is a normal good, when people have increase in their income, the demand of beer will increase as well and therefore, it will manage to avoid the surpassing of quantity supplied and approach equilibrium position. There are three factors that influence the elasticity of demand which are the closeness of substitutes, the proportion of income spent on the good and the time elapsed since a price change. I think that beer should be categorized as luxuries because not everyone can afford to buy and only those high end families can afford to buy therefore it is an elastic demand. The greater the proportion of income consumers spend on beer, the larger is the elasticity of demand for beer. Income elasticity of demand measures the responsiveness of demand to a change in income, other things remaining the same. Beer is considered as normal good therefore, the income elasticity of demand is positive.

         A price ceiling or price cap is a regulation that makes it illegal to charge a price higher than a specified level. Price ceiling will lead to market failure such as underproduction or shortage of beer and black market will occur. I predict that if the government impose price ceiling on beer, the quantity of electricity supplied will decrease to less than the efficient quantity. As the quantity electricity supplied decreases, a deadweight loss will occur and arises. Besides that, producer surplus and consumer surplus will shrink. There will be a potential loss from increased search activity. From my point of view, price ceiling will only cause negative effects to both producer and consumer due to both of their surplus shrinks. Moreover, consumer will face shortage of beer if price ceiling of beer occurs and therefore creates a black market in beer. A black market is an illegal market that operates alongside a legal market in which a price ceiling or other restriction has been imposed. I predict that black market will sell the beer at a much higher price when shortage of beer occurs. Hence, discrimination will occur if the price ceiling of beer is imposed because the black market will keep a lot of beer once they predict that the price of beer will increase and sell it at a higher price so that they can earn. Other than that, there is tax imposed on beer. Tax incidence is the division of the burden of a tax between buyers and sellers. As tax increases, price of beer will also increase. I believe that if the tax imposed on beer is too high, it will lead to increasing of price on beer and lots of people will lose their job and pub will force to close down. Lastly, a subsidy is a payment made by the government to the producer. I felt that the government will not impose subsidy on beer because beer will harm people’s health and the government hope that people will avoid alcohol and have a healthy lifestyle.

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