Elasticity of Consumption of Unhealthy Foods †MyAssignmenthelp.com

Question: Discuss about the Elasticity of Consumption of Unhealthy Foods. Answer: Introduction: It is seen that in order to improve health of consumers in the economy it is necessary that the government impose taxes or subsidy on the right goods to help people curb their consumption of unhealthy foods. Elasticity of demand pays a crucial role in helping the government decide the types of food they will impose taxes or subsidy this is because elasticity of demand tells the degree of effect on demand with a change in price of the goods. The demand for inelastic goods will not change with a change in price. On the other hand, demand for elastic goods gets affected to greater extent to slight change in price. Thus, in the particular scenario it is seen that some of the categories of dairy products and fruits and vegetable of higher calorie has high elasticity of demand while others low calorie fruits and vegetable have low elastic demand. Similarly, some of the high calories grains also have high elasticity of demand while low calories grain has low elasticity of demand. Thus, the government can increase the price of high calorie goods that has higher calorie, which will change the demand significantly. Similarly, it can lower the price of healthy and low calorie foods with higher elasticity so that with low prices the demand increases drastically. Figure 1: increase in government spending From the above diagram, it can be seen that by increasing total government spending in the economy, there will be an increase in money supply. This can be seen by a rightward shift in the LM curve from LM to LM1. With an increase in LM curve and money supply in the economy there will be more money in the hand of the people. This increases the savings of the customers shifting the IS curve to the right from IS to IS1. Increase in money supply initially leads to an increase in interest rate in the economy, which increases investment. Thus, such an effect for the temporary period until the IS curve does not shift and adjust the interest rate helps in increasing economic activity in the economy. During recession automatic stabilizers act in the economy in the form of increasing budget deficit automatically in the economy by reduction in corporate tax, low tax revenue from progressive taxes and others. Taxes from corporate profit reduce at the time of recession and low tax liability on the rich people during recession. This makes it necessary for the government to intervene with required fiscal policy. This is because a change in fiscal policy will stabilize the changing condition of the economy during recession such as increasing corporate tax or changing the type of taxes charged. Thus, separating fiscal policy from automatic changes will lead to the fall in economic condition further. Fiscal contraction that is ignored in the respective debate can be used to improve macroeconomic performances because with a contraction in fiscal policy such as increasing tax and lowering spending of the government the economy can curb wasteful spending on programs. This will lower interest rate, accelerate the rate of real investment, and reduce crowding out effect. This in turn leads to an increase in the national income of the economy. This is done because the spending on programs is not an investment and will not lead to addition to GDP of the country. Thus turning the spending from such programs to useful private investment will increase national income. Monetary policy as compared to fiscal policy work quickly on the economy as it directly effects the money market. This can be seen as with expansionary monetary policy the money supply increases in the economy and this leads to a fall in the interest rate. A fall in the interest rate leads to a fall in the investment as investment becomes less profitable. However, the effect is fast because it directly hits the money market, which allows the consumers to react quickly on it. On the other hand, fiscal policy takes time to put its effect on the economy. Thus, expansionary monetary policy is better than the fiscal policy.