ECONOMICS FOR MANAGERS

CASE NUMBER 1 :

TWO WAYS TO REDUCE THE QUANTITY OF SMOKING DEMANDED

Public policymakers often want to reduce the amount that people smoke. There are two ways that policy can attempt to achieve this goal. One way to reduce smoking is to shift the demand curve for cigarettes and other tobacco products. Public service announcements, mandatory health warnings on cigarette packages, and the prohibition of cigarette advertising on television are all policies aimed at reducing the quantity of cigarettes demanded at any given price. If successful, these policies shift the demand curve for cigarettes to the left, as in panel (a) of Figure 4-4. Alternatively, policymakers can try to raise the price of cigarettes. If the government taxes the manufacture of cigarettes, for example, cigarette companies pass much of this tax on to consumers in the form of higher prices. A higher price encourages smokers to reduce the numbers of cigarettes they smoke. In this case, the reduced amount of smoking does not represent a shift in the demand curve. Instead, it represents a movement along the same demand curve to a point with a higher price and lower quantity, as in panel (b) of Figure 4-4. How much does the amount of smoking respond to changes in the price of cigarettes? Economists have attempted to answer this question by studying what happens when the tax on cigarettes changes. They have found that a 10 percent increase in the price causes a 4 percent reduction in the quantity demanded. Teenagers are found to be especially sensitive to the price of cigarettes: A 10 percent increase in the price causes a 12 percent drop in teenage smoking. A related question is how the price of cigarettes affects the demand for illicit drugs, such as marijuana. Opponents of cigarette taxes often argue that tobacco and marijuana are substitutes, so that high cigarette prices encourage marijuana use. By contrast, many experts on substance abuse view tobacco as a gateway drug leading the young to experiment with other harmful substances. Most stud ies of the data are consistent with this view: They find that lower cigarette prices are associated with greater use of marijuana. In other words, tobacco and marijuana appear to be complements rather than substitutes.

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SOLUTION TO CASE STUDY 1 :-

As we have studied the case , we have understood that the govt wants to reduce the demand and consumption of cigarettes. Before understanding what the government can do to reduce the demand of cigarettes. Let us learn actually what factors affect the shift in demand curve.

Factors that leads to shifts in demand curve

Price: Studies have shown that a 10% increase in the price of cigarettes causes a 4% reduction in the quantity of cigarettes demanded. For teens, 10% increases in price leads to a 12% drop in quantity demanded. Studies have also shown that a decrease in the price of cigarettes is associated with greater use of marijuana. Thus, it appears that tobacco and marijuana are complements. Income: Income plays a situational role. Situational as in when income of smokers increases their consumption pattern and spending amount on cigarettes also changes, and opt for high quality product of cigar. For e.g.: When their income decreases their consumption dose not affect much but they opt for lower quality of cigar. For e.g. Beedi But there are exceptions in some cases, when income of consumer using high quality cigars decreases then there is negligible impact on their purchasing and consumption pattern. Prices of related goods: When price of cigarettes increases; consumer demand more for

marijuana or tobacco (as cigarettes consume tobacco and the same is present in this two thus both satisfy same). Thus here marijuana and tobacco are substitute for cigar, and substitute are often pair of each other where fall in one price of goods reduces the demand for another goods, price of related goods and demand have indirect relationship. Such as tea and coffee. Now suppose, price of tobacco falls the law of demand say you will buy more tobacco but in this case your demand for cigars will increase as it contains tobacco, also known as compliments goods. Compliments are often used together, such as gasoline and automobiles.
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Tastes: Here taste plays an important role. Cigarettes are often not consumed by everyone. Taste is based on historical and psychological forces that are beyond the realm of economics. Taste can be influenced by peer groups and colleagues specially teenagers are targeted most and often psychological factors depression or anxiety influence taste and in historical Expectation: Here expectation will not play any role because even if consumers income will increase in future his willingness to consume or purchase will not have any effect. Number of buyers: Market demand is derived from individual demand, it depends on all those factors that determine the demand of individual buyers, including buyers incomes, tastes, expectations, and the price of related goods in addition, it depends on the number of buyers. Thus, number of buyers for cigarettes increases demand also increases. Basically the government can do reduction in demand and consumption in two ways is that it can increase the price of cigarettes with a great margin. It can modify taxation policies i.e increase in tax for cigar. The demand curve does not shift in this case. An increase in the price of cigarettes can be shown by a movement along the original demand curve. Public service announcements, mandatory health warnings on cigarette packages, and the prohibition of cigarette advertising on television are policies designed to reduce the demand for cigarettes (and shift the demand curve to the left). Government can start an anti-smoking campaign using film stars, which promotes anti-smoking, The stars can high light its negative consequences. As we all know country such as India film stars are considered Godfather. The public blindly follow them. The campaign can have great impact. The perception regarding smoking needs to be changed. These are solution that government can do to curb demand for cigarettes

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CASE 2 :

INTERNATIONAL DIFFERENCES IN GDP AND THE QUALITY OF LIFE

One way to gauge the usefulness of GDP as a measure of economic well-being is to examine international data. Rich and poor countries have vastly different levels of GDP per person. If a large GDP leads to a higher standard of living, then we should observe GDP to be strongly correlated with measures of the quality of life. And, in fact, we do. Table 22-3 shows 12 of the worlds most populous countries ranked in order of GDP per person. The table also shows life expectancy (the expected life span at birth) and literacy (the percentage of the adult population that can read) and Internet usage(the percentage of the population that uses the Internet). These data show a clear pattern. In rich countries, such as the United States, Japan, and Germany, people can expect to live into their late seventies, and almost all of the population can read and about half the population uses the Internet. In poor countries, such as Nigeria, Bangladesh, and Pakistan, people typically live only until their fifties or early sixties, and only about half of the population is literate, and Internet usage is very rare.

Data on other aspects of the quality of life are less complete, they tell a similar story. Countries with low GDP per person tend to have more infants with low birth weight, higher rates of infant mortality, higher rates of maternal mortality, higher rates of child malnutrition, and less common access to safe drinking water. In countries with low GDP per person, fewer school-age children are actually in school, and those who are in school must learn with fewer teachers per student. These countries also tend to have fewer televisions, fewer telephones, fewer paved roads, and fewer households with electricity. International data leave no doubt that a nations GDP is closely associated with its citizens standard of living.

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SOLUTION TO CASE STUDY 2 :-

While studying the case study, it has left a great remark in the mind, Is GDP really a good indicator of well being of the country ??? Is it true indicator of position of the country in the world. Is there any other alternative to measure the well being or position of the country??? To understand the case we need to understand what actually GDP is all about? So let us learn the concepts of GDP. Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time.

To understand how the economy is using its scarce resources, economists are often interested in studying the composition of GDP among various types of spending. To do this, GDP (which we denote as Y) is divided into four components: consumption (C), investment (I), government purchases (G), and net exports (NX): Y =C + I + G +NX. This equation is an identityan equation that must be true by the way the variables in the equation are defined. In this case, because each dollar of expenditure included in GDP is placed into one of the four components of GDP, the total of the four components must be equal to GDP. We have just seen an example of each component. Consumption is spending by households on goods and services, such as the Smiths lunch at Burger King. Investment is the purchase of capital equipment, inventories, and structures, such as the General Motors factory. Investment also includes expenditure on new housing. (By convention, expenditure on new housing is the one form of household spending categorized as investment rather than consumption.) Government purchases include spending on goods and services by local, state, and federal governments, such as the Navys purchase of a submarine. Net exports equal the purchases of domestically produced goods by foreigners (exports) minus the domestic purchases of foreign goods (imports). A domestic firms sale to a buyer in another country, such as the Boeing sale to British Airways, increases net exports. The net in net exports refers to the fact that imports are subtracted from exports. This subtraction is made because imports of goods and services are included in other components of GDP. GDP measures total income of everyone in the economy and the total expenditure on the economys output of goods and services. Thus, GDP per person tells us the income and expenditure of the average person in the economy. Thus GDP does not directly measure those things that make life worthwhile, but it does measure our ability to obtain the inputs into a worthwhile life.
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Other factor is things that contribute to a good life are left out of GDP. GDP uses market prices to value goods and services, it excludes the value of almost all activity that takes place outside of markets GDP per person tells us what happens to the average person, but behind the average lies a large variety of personal experiences. Thus, there is a difference in GDP between two countries. In the end, we can conclude that GDP is a good measure of economic wellbeing for mostbut not allpurposes. It is important to keep in mind what GDP includes and what it leaves out.

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CASE 3 :

MR. INDEX GOES TO HOLLYWOOD

What was the most popular movie of all time? The answer might surprise you. Movie popularity is usually gauged by box office receipts. By that measure, Titanic is the No. 1 movie of all time, followed by Star Wars, Shrek II, and ET. But this ranking ignores an obvious but important fact: Prices, including the price of movie tickets, have been rising over time. When we correct box office receipts for the effects of inflation, the story is very different. Table shows the top ten movies of all time, ranked by inflation adjusted box office receipts. The No. 1 movie is Gone with the Wind, which was released in 1939 and is well ahead of Titanic. In the 1930s, before everyone had televisions in their homes, about 90 million Americans went to the cinema each week, compared to about 25 million today. But the movies from that era rarely show up in popularity rankings because ticket prices were only a quarter. Scarlett and Rhett fare a lot better once we correct for the effects of inflation.
Film Release year Total Domestic Gross (in millions of 2004 $) 1. 2. 3. 4. 5. Gone with the wind Star wars The Sound of Music E.T. The Ten Commandments 1939 1977 1965 1982 1956 1,254 1,084 870 861 801

6.

Titanic

1997

789

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SOLUTION TO CASE STUDY 3:Overview:
As case indicates that movies popularity is usually gauged by box-office receipts. Also each calculation and data refers to only the income incurred by any movie and total collection in comparison of its total expenditures Here, as data given in case study Titanic is the No:1 movie of all time, followed by Star Wars series, Sherk-2, E.T. but that ranking ignores an obvious but important fact including those of movie tickets, have been rising over time. Its according to the popularity and other parameters which are not in control of economic fundamentals. When corrected that box-office receipents for the effect of inflation, that rankings are differ in nature.

Film

Release year

Total Domestic Gross (in millions of 2004 $)

7. 8. 9. 10. 11.

Gone with the wind Star wars The Sound of Music E.T. The Commandments

1939 1977 1965 1982 Ten 1956

1,254 1,084 870 861 801

12.

Titanic

1997

789

All expenditures are driven by various variables of current economic and financial scenarios. Here, if we see as per economics point of view. In 1930s, before everyone had televisions in their homes, about 90 million American went to the cinema each week, compared to about 25 million today. So that shows that maximization of inflation or price rise accordingly.

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Effects: Here, without comparing income data without any kind of application of economic parameters all data regards to nominal or total income related only. That not shows proper comparison. E.g. AS case study is given data that without monetary comparison and only its depends up on perception and likeness as shown in eg of case by Titanic and Movie Gone with the wind When actually calculation after economics rules application it shows vast difference in box-office chart. As Gone with the wind is on top and Titanic on 6th rank.

Conclusion: As per inflation concern, that changes minds of people about watching any movie rather its good or bad movie. Inflation affects to both movie distributors as well as their audiences because if ticket prices are high than its difficult to have good mount of audience but in same case if, that audience have more money than they will go for same just because of their willingness and their earning income.

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BIBLIOGRAPHY

Mankiw N. Gregory Economic : Principles and Applications CENGAGE LEARNING New Delhi, India

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