Question

Background Information:
A tax on Cigarettes introduced in Mexico in 2014 increased the price of Cigarettes
by about 10%. An evaluation of the first two years of this measure found that Cigarette consumption fell
on average by 7.6%, with a larger decrease (11.7%) in low income households. The study also
estimated an increase in consumption of alternatives to smoking, particularly Nicotine patches, of
2.1% (AYA, 2017)

Question

How would I Draw a demand and supply diagram for the market for Cigarettes in Mexico based on the information above?
How would I name and fully label the diagram including both axes, and indicate and explain points of
interest using P for price (P1, P2 etc) and Q for quantity (Q1, Q2 etc). Draw the demand curve
assuming the elasticity for the whole Mexican economy holds. (Don’t use actual numbers, it
can’t be exact with the information given – just decide roughly how steep or flat to draw it,
and give a reason for your choice).

Then

After you've drawn the diagram for the above (before a tax is imposed)

Answer 1

Based on the given information, the market for cigarettes in Mexico appears to have rather inelastic demand, with respect to price.

An increase in price by 10% has reduced the quantity demanded by about 7.6%.

The demand for substitutes has risen by only 2.1%, which shows how inelastic the demand for cigarettes is. Thus, the demand curve would be steep.

A steep demand curve implies that % change in price is greater than % change in quantity demanded.

The tax reduces the quantity demanded, and raises the price for buyers.

This can be shown on a graph as follows: