ECO105 Price Elasticity of Beer Demand in Australia
2. What explains the differences in beer consumption in Australia vs. the advanced country that you picked in Q1?
3. Explain the price elasticity of beer demand in Australia.
4. Draw and label fully a supply and demand curve diagram to explain how an excise tax affects the market of beer.
6. Describe and evaluate the various policies over the years (other than a tax) that the Australian governments have enacted in order to reduce alcohol consumption.
Use a combination of material from text book and online sources to answer the above questions.
Answer:
As observed from the above figure beer consumption in Canada exceeds that in Australia. The preference towards alcoholic beverages in Canada tend to be more as compared to Australia (Weersink, Probyn-Smith & Von Massow 2018). In Australia however, strict governmental policy measures help to reduce consumption of beer over time.
Price elasticity of beer demand in Australia
Price elasticity of demand allows an estimation for measuring impact of a change in price on the sales volume of the particular good. Given, the inverse relation between demand and price of a good own price elasticity has a negative sign. The elasticity measure greater than 1 indicates price elastic demand whereas elasticity measure less than 1 indicates price inelastic demand. The flexibility of demand change in response to price depends on several factors. These include number of substitute available, frequency of purchasing the good, whether the good is habit forming and such other.
Beer is usually a product that is forming habit. People are not much willing to change their demand in response to price constituting an inelastic demand for beer. The elasticity of Beer demand varies in the range from – 0.46 to -0.83. This shows Beer in Australia has a negative and inelastic demand. The elasticity estimate varies among different age and income group. Australians belonging to the age group 16 overconsume Beer and have more inelastic demand (Jiang et al. 2016). Beer demand tends to have higher elasticity for low income household compared to middle and high income household.
Effect of excise tax on Beer market
Exercise tax is the tax on particular commodity. This kind of tax increases price of the commodity paid by the consumer while reduces the net price received by the seller. Australian government imposes excuse duty on alcoholic beverages following the Excise Tariff Act 1921. The excise rate varies with volume of alcohol contains (Nelson & McNall 2016). The figure below analyzes effect of excise tax on Beer market with a demand and supply framework.
The demand curve of beer is shown as DD. Given the fact that beer demand is relatively inelastic in nature, the demand curve for beer is drawn steeper. The representative supply curve of beer is shown as SS. Without the excise tax, the acquired equilibrium is at E yielding equilibrium price at P* and that of equilibrium quantity at Q*. Now, imposition of excise tax shifts the supply curve upward to S1S1 by the amount of tax.
This is because the imposed tax reduces the profit of seller as a significant portion now have to paid for tax payment (Cowell 2018). Under this situation, equilibrium is attained at the point E1. At this equilibrium quantity sold in the market reduces to Q1. Consumers now pay a higher price at P1 while the net price to seller reduces to P2. Tax revenue to the government is indicated by the area P1P2FE1.
Cost Benefit Analysis
Cost benefit analysis is a convenient instrument for making an economic or business decision. The analyst or business first sums all the benefits derived from a project or decision. The costs of undertaking the decision then subtracted from the benefits. The cost benefit analysis is defined as a systematic approach for computing and comparing the benefits and cost associated with a particular decision. The analysis has two main objectives
- To find whether a decision is sound that whether the benefits exceed cost and if so then by what magnitude
- To offer a tool for comparing different projects and decision before taking a particular one.
First step here is to prepare a comprehensive list including all benefits and costs involved in a decision. The costs include direct costs, indirect costs, opportunity cost, intangible cost and cost incurred from other potential risk. Benefits include all the direct and indirect benefits from the decision (Hastings 2015). A common unit then is applied to compare the costs and benefits and decision is taken only if benefits outweighs associated costs.
The cost benefit analysis has huge implication for public policy disclosure. Government takes the decision to reduce beer consumption after analyzing the costs and benefits of a such a policy. The cost and benefits of a policy to restrict alcohol consumption is discussed below
Costs
Implementation cost: The implementation cost of policy refers to actual cost for implanting the policy such as collection of taxes, enforcement of anti-drink measures, identification and advice program.
Cost to industry: Such policies generally lead to reduction in consumption of alcohol, imposing some potential cost to the industry such as loss of jobs in the industry. This cost however might be offset by creation of jobs in some other industry.
Non-financial welfare cost: This include the cost that consumers place on the lost value from the pleasure of drinking beer.
Benefits
Reduce health and welfare cost: Drinking of beer and other alcoholic beverages causes several health hazards and increases public health expenditure (Cookson et al. 2017). Reduction in beer consumption provides benefits in form of reduction in public health expenditure.
Prevents productivity loss
Reduction in non-financial welfare loss
As the benefits of restrictive policies far exceed the cost of implementing such policies government wishes to reduce the rate of beer consumption
Policies to reduce alcohol consumption in Australia
Apart from taxation several policies have been undertaken in Australia to reduce alcohol consumption and protect the community from the harmful consequences of excessive drinking. Some of these policies are discussed below.
Informing the community
Educational strategies are taken to increase knowledge of the community regarding alcoholic issues, promotion of positive or healthy attitude for use of alcohol and promotion of safe use of alcohol. The community education program in Australia include public education program and community initiatives targeting particular group in the community. Such programs use mass media, information network and printed materials to spread information regarding alcohol. Evaluation of such education based campaign revealed that attitude of the community towards alcohol consumption changed significantly over the period of time.
Prevention of alcohol consumption among youth
Research suggests that while the per capital alcohol consumption in Australia has decline over time, the tendency of drinking alcohol among young Australian has increased significantly. Therefore, strategies are taken to help the young people to learn and understand the harmful consequences of excessive alcohol drinking. Parents are also encouraged to support government programs and discuss with their children about possible misuse of alcohol.
Good Sports Program
The Australian government commits to spend $19 million over a period of four years to Australian Drug Foundation aiming to continue Good Sports Programs (The Department of Health 2018). Objective of such programs is to change attitude and behavior towards alcohol consumption by initiating partnership with different sporting club.
Labor market
Real wage growth
Real wage shows the compensation paid to workers which is adjusted for inflation. Growth in real wage is the rate of change in the compensation after considering the effect of inflation (Daly and Hobijn 2017). For example, if nominal wage grows by 5% with an increase in price level by 3%, then real wage is said to be increased by 2%.
Comparison of real wage growth in Australia and United State
Growth in average real in Australia has been steadily declined since 2007. As real wage is the inflation adjusted nominal wage, weak inflationary pressure over time helped to maintain a positive wage growth. Different factor contributing to slow wage growth in Australia include weak growth in productivity, spare capacity in the labor market and weak inflation (Preston 2018). Data on wage price index shows that average wage growth reached to the lowest level during 2016 and 2017. In the last ten years, wage growth in public sector is mostly stronger than that of the private sector.
The data on real wage growth in United State has shown that there are some years when US experienced a negative wage growth while positive growth is accounted in some other. The highest growth rate in the last ten years has been recorded in 2008. During this year, the average hourly wage growth far exceeds the average weekly earnings. Due to global financial crisis occurred in 2008, the slow-down in economic activity significantly reduces wage growth with the growth rate becoming negative. In recent years, wage growth though has declined but remained positive.
Current minimum wage laws in Australia
The minimum wage is the base rate of an employee paid for ordinary hours of work. In Australia the experts of Fair Work Commission review the minimum wage in the economy and revise it if necessary. Recently, the minimum wage in Australia has increased by 3.5% to become $18.93 per hour or $719.20 for per 38 hours worked (Fair Work 2018). The stronger economic outlook has allowed FWC to raise the minimum wage.
Personal experience from increased minimum wage
I am currently working in the retail trade sector of Australia. The increase in Minimum wage has allowed me to earn more with same labor hours as before. This in turn helps to increase purchasing power and hence, average living standard.
References
Bureau of Labor Statistics 2018, Real average hourly earnings up 0.4 percent and real average weekly earnings up 0.7 percent in 2017. The Economics Daily: U.S. Bureau of Labor Statistics.
Cookson, R, Mirelman, AJ, Griffin, S, Asaria, M, Dawkins, B, Norheim, OF, Verguet, S & Culyer, AJ 2017, Using cost-effectiveness analysis to address health equity concerns. Value in Health, 20(2), pp.206-212.
Cowell, F 2018, Microeconomics: principles and analysis. Oxford University Press.
Daly, MC and Hobijn, B 2017, Composition and aggregate real wage growth. American Economic Review, 107(5), pp.349-52.
Fair Work 2018, Fair Work Ombudsman.
Hastings, NAJ 2015, Cost–Benefit Analysis. In Physical Asset Management (pp. 239-248). Springer, Cham.
Jiang, H, Livingston, M, Room, R & Callinan, S 2016, Price elasticity of on-and off-premises demand for alcoholic drinks: A Tobit analysis. Drug and alcohol dependence, 163, pp.222-228.
Nelson, JP & McNall, AD 2016, Alcohol prices, taxes, and alcohol-related harms: a critical review of natural experiments in alcohol policy for nine countries. Health policy, 120(3), pp.264-272.
Preston, A 2018, The structure and determinants of wage relativities: evidence from Australia. Routledge.
The Department of Health 2018, Alcohol
Tradingeconomics 2018, Australia Annual Change in Hourly Rates of Pay | 1998-2018 | Data |
Weersink, A, Probyn-Smith, K & Von Massow, M 2018, The Canadian craft beer sector. In Economic Perspectives on Craft Beer (pp. 89-113). Palgrave Macmillan, Cham.
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