MPE781 T1 2019 Assignment: Economic Analysis of Consumer Behaviour

This economics assignment delves into various aspects of consumer behaviour and economic policies. It begins by exploring the classification of goods (normal, luxury, and inferior) and their implications on consumer budget allocation, illustrating these concepts with diagrams. The assignment then examines the role of taxation, particularly on goods like sugar, rum, and tobacco, and the government's revenue generation strategies. Furthermore, it analyzes Adam Smith's views on taxation, income equality, and the implementation of progressive tax systems. The study also investigates the impact of taxing sugary drinks in Australia, discussing its potential benefits on public health and the economy, including considerations on deadweight loss, and the effects of subsidies on the consumption of healthier alternatives like salads. The assignment incorporates relevant figures and diagrams to support the analysis and provides a comprehensive overview of the economic principles at play.

Running head: Economics Assignment
ECONOMICS ASSIGNMENT
Name of the student
Course name
Course ID

1
Economics Assignment
Question 1:.................................................................................................................................2
Question 2:.................................................................................................................................4
Question 3:.................................................................................................................................5
Question 4:.................................................................................................................................6
Question 5:.................................................................................................................................8
Question 6:...............................................................................................................................10
Reference list............................................................................................................................13

2
Economics Assignment
Question 1:
In the modern consumer theory, the necessary goods are the goods for which the
demand will be higher if the income of the consumer increases. The normal goods have
positive income elasticity of demand. On the other hand, the normal goods can be income
elastic or inelastic in nature. The luxury goods are those goods for which one percent increase
in the price will increase the demand of the goods by huge margin. The income elasticity is
greater than one. Identification of the goods is important for the consumer behaviour because
of the fact that elasticity is one of the important aspects that will determine budget of the
consumer (Aghion et al. 2015). The development of elasticity rate is going to help the
consumers in allocating their budget while purchasing the goods. For example, the sports cars
will be considered as one of the luxurious goods. This is because; with the increase in
income, the desires of the consumer to purchase the goods will increase by huge margin.
Goods like food items in the form of chocolates are considered as normal goods.
Figure 1: Elasticity in normal and luxurious goods
(Source: Created by Author)
In the above diagram, the demand curve for the luxurious goods is going to flat one.
This is because the degree of responsiveness is very high for the luxurious goods. This is

3
Economics Assignment
mainly happening in the sense that due to increase in price of one unit the demand for the
luxurious good will increases by huge margin (Amir et al. 2016). Now if a consumer wants to
purchase a luxury goods then the whole income of consumer will be allocated in purchasing
the product. In the given example, ‘sugar, rum and tobacco’ sugar is the necessary goods and
rum is the luxurious goods. Tobacco is the inferior goods. Now suppose the budget of the
consumer is M=Px.X+Py.Y. Taking the example let us consider X and Y to be as sugar and
rum respectively. It is important aspect in the sense that if the consumer wants to purchase
rum then the consumer will allocate all the income of the consumer in purchasing the rum.
Taking into account the perspective of government, taxing the normal goods will earn
more revenue for the government compared to the luxurious one. This is because the
consumers will not stop consuming the necessity goods even if the price increases, the might
minimise the quantities purchased in order to curtail their budget. On the other hands through
the taxing of the luxurious goods will automatically increase the price of the products. Rise in
price will automatically force the limited customer to back out from purchasing the products.
This is one of the important aspects because of through the development of taxing policy of
luxurious goods will remove the customers.
Figure 2: Taxing luxurious and necesssity goods
Another kind of elaticity that the economy is considering is price elasticty of demand.
Price elasticty of demand is the degree of responsiveness of the quantity demanded with one

4
Economics Assignment
unit change in price. Now a good is inelastic in nature if the quantity demanded changes
slighty with one unit change in price. Normal or necessity goods will be having inelastic
deamnd curve. on the other hand luxurious goods will be highly elastic in nature. One of the
gretest example that defines the revenue collection from the inelastic demand is the
consumption of gasoline. Between 2007-2014, price of the gasoline has increased but the
consumption of the gasoline has remained constant.
Figure 3: Consumption pattern of household of gasoline
(Source: Bls.gov, 2019)
Question 2:
The main motion of this proposal of Adam Smith in the sense that he wanted to bring
in equality in the nations so that the rich can be taxed and will be more willing to identify the
pros and cons of the taxing the rich. Through this initiative, the economy will be able to
increase the initiative to pay more for the poor and give them benefits in the form of tax
discounts. On the other hand, using the technologically ways to tax the luxurious item will
obviously help the development of the income equality within the economy. On the other
hand, through this policy, the economy will boost up rate of monitoring the tax so that the
rich people will not be able to evade tax.

5
Economics Assignment
Adam Smith always batted for the fair tax within the nation so that the nation will get
equality in the tax structure. On the other hand, Adam Smith in his wealth of nations will be
looking into the matter of introducing Value added Tax and according to him,
implementation of progressive tax instead of regressive tax. This is significant for any
economy to introduce progressive tax that will automatically highlight the importance of
taxing the rich so that the share of their income can be distributed among the poor effectively.
Question 3:
This study is highly important from the perspective of Australia regarding the fact that
in Australia, about 65% of the population are overweight and they are suffering from obesity
level. Huge consumption of sugar-based drinks are hampering the health condition of the
adult kids and children. Now taxing the sugary drinks will be beneficial for the whole
economy in the sense that this will increase the price of those products and people will
consume less. It has been seen from the Australian health survey in the year 2011-12,
employees aged 15-64 had less chance of being in paid jobs. Most of the young employees
required more level of sick leaves (The Conversation, 2017).
The results claimed that 20% tax on the sugar will lead to the result that 400,000
fewer people will face the obesity. Moreover, taxing the sugar drinks in Australia will save
1600 lives and will save thousands of people from heart attacks and strokes. Moreover, it has
been seen that Australian economy would have earned more than A$750 million in 2010-
2011 if they could have implemented tax on the sugar items, as this would have created 20%
more healthy workers. Through the taxation, the Australian economy will be able to deliver
A$2 billion in economic benefits in indirect taxation (The Conversation, 2017). This is
important in the sense that through the improvisation of tax the Australian economy will be
mainly looking to bring sustainability within the economic resources regarding the human

6
Economics Assignment
resources. This is highly important because of the fact that economy will be able to spend the
tax revenue in the health sectors and can improve the health sector in a better way.
Not only the taxing of sugar items will benefit the Australian economy but also
countries like UK and South Africa will also get benefits from taxing of the sugar drinks. The
number of obesity in UK will reduce by 1.3% and 2-4% in South Africa (The Conversation,
2017). This is going to highly benefit these countries because of the fact that in the global
world, the number of healthy population will increase and that will increase the overall
production ability of the world human resource. Through the survey one thing was cleared is
that the economy will be benefited from taxing policy of sugar drinks. Responding to the
situation of getting healthier will allow the economy to consume more amount of salt.
Question 4:
Deadweight loss is the gap among the producer and consumer surplus. Now the
producer surplus is the difference among the price the producers that they are getting and the
price they are willing to get. On the other hand, the consumer surpluses are the price the
consumers are willing to pay and the price they are actually paying to the producers for the
goods.

7
Economics Assignment
Figure 4: Deadweight loss
The deadweight loss is the small triangle that is getting at the intersection at the point
of consumer and producer surplus. Through the development of taxation, deadweight loss
actually will be beneficial for the development of market imperfections (Blomquist and
Simula, 2018). Now if the sugar drinks are being taxed then the whole deadweight loss will
fall on the producer. This will definitely force the producers to increase their cost of operation
that will automatically allow the price of the products to increase. On the other hand, if the
consumers are rational then they will stop consuming the sugar drinks and the demand will
decrease in the market. From the above diagram, the revenue of the firm will be decreasing
and the producers if they operate in the perfect competition market then they will obviously
reduce the quantity supplied to the market. On the other hand, they have to move from the
given market situation and some else company will come and replace them with high quality
of goods. The cost of production will increase that will force them to increase their price.

8
Economics Assignment
After the imposition of the tax on the sugar drinks, the producers will face the biggest
loss. Decrease in the consumption in the sugar-based drinks will decrease the level of
marketing of the sugar products as the price of the sugar based will decrease. Since the
deadweight, loss is claiming the price the producers, consumers willing to get, the price, and
the actual price they are getting. The consumers will get many substitutes and through the
implementation of deadweight loss, the demand for the sugar-based products will decrease
that will lead to the leftward supply of demand curve.
Question 5:
Subsidy should be given to the consumption of salads will automatically help the
salad market to grow. This is because since salads are hydrating and it acts as complete
substitution for the sugar based products. The salads will be helpful for the economy of the
Australia to increase the development of the health condition of the economy of the
Australian. The people will be healthier if they increase the level of consumption. On the
other hand, through the utilisation of salads will bring the better involvement of strategies.
Moreover, the economy will be facing increased level of supply curve due to increased level
of the demand curve.
Due to implementation of subsidy, the demand curve of the economy will be shifted
towards right. This will make the price to fall and quantity will increase by huge margin.

9
Economics Assignment
Figure 5: Impact of subsidy
In the end, the development of better resources will obviously allow the economy to
bring best quality of goods that will bring the best. In this case, study, the provision of
subsidy will increase the consumption of salads, as the price will fall by huge margin.
Separate market for the salad will be created in the sense that with the increased level of
demand will obviously going to take place. This is positive aspect for the economy of
Australia as they will be able to increase the improvement in their marketing of their
products. Through the increased level of the economic variation and considering the health
benefit of salad consumption the market of Salad will grow as the subsidy on salad will
reduce the consumption expenditure of the consumer. It is important in the sense that through
the development of subsidy in the goods that are healthy for the whole economy will bring
more production ability. Since the consumption of salads are healthier habit thus providing of
subsidies for the development of healthy atmosphere in the economy. Developed nations like
UK and USA has already implemented the tax on the sugar based drinks and mineral bottles
having artificial sweetener. However, the Australian economy is going implement taxation in
the economy as the government is aiming to increase the health conditions of the employees.
Countries as UK has already implemented 20% more hike in price in the sugar drinks.
In order to implement the policy of healthy atmosphere, the Australian economy is
going to implement better understanding of taxing the sugar-based items will be mainly
looking to incorporate the changes in the policymaking that will definitely allow the
importance of implementing policies of subsidising more fruits and vegetables. This will
definitely increase the development of the resource utilisation in order to increase the
subsidisation on the vegetable and fruits consumption.

10
Economics Assignment
Question 6:
The main component of the perfectly competitive market is that free entry and free
exit of the firms from the industry. Now if the sugary drinks are being sold in perfectly
competitive industry, the taxation will have different effect in short and long run.
Figure 6: Taxation in long and short run
Taxing a product in the perfectly competitive market is going to suffer a loss in the
short run. Through the improvisation of taxation in the product Average total cost curve will
increase the making the MC curve to shift leftward. The leftward drift of the economy will
bring MC curve to shift leftwards. Due to this impact, the quantity that are being produced in
the economy will fall and due to the per unit tax, the price of the product will rise. Now
increase in the price will be having another impact in the form of reduced number or leftward
shift of the demand curve.

11
Economics Assignment
Figure 7: Firms and industry in PC
Through the implementation of taxation, the price of the individual firms will increase
their per unit marginal costs. This will readily decrease the amount of consumption mainly
due to the fall in demand curve. This will decrease the quantity that is being consumed within
the economy. Moreover, through the utilisation of tax, the individual firm are going to suffer
huge loss as their cost of production will increase and they will not be able to increase that
much of production. The long run effect will be bit moderate in the sense that only the
demand curve will fall and the LRAS will be flat in nature and will shift towards left.
Under the situation of perfect competition, firm produces an output at which price
does equal MC. If the price is more than MC then the firm will obviously increase the output
in order to increase the level to the MC and if the MC is less than price then the firm will
reduce the output production.
Figure 8: Supply curve of the industry
In the above diagram, the SMC curve is lying above SAVC curve. The short run
supply of the industry has been identified from the horizontal summation of the supply curves
of firms.