Economics of smoking

Economic theory suggests that the main independent variable factors of demand for cigarettes are going to be based on the price and income of consumers. This assumes that cigarettes are a normal good, a good for which the income elasticity of demand is positive. Classifying cigarettes as a normal good suggests that as a person’s income goes up. Consumption of cigarettes will also go up enabling income to be a factor of demand. However, if the consumption of cigarettes went down as income went up then income can not be used as a factor of demand. This type of good is classed as an inferior one.

The prices of cigarettes are going up and according to economic theory demand must therefore go down. The law of demand suggests that as the price of a good goes up, providing that it is a normal good, then demand for that good will go down. This theory takes into account that all other things remain equal, ceteris paribus. A movement up the demand curve suggests that as price rises from PO to P1 then demand goes down from DO to D1. However, evidence1 shows that demand for cigarettes over the years 1971-1981 has gone up, hence, contradicting economic theory.

The economic theory about income assumes cigarettes are a normal good. If cigarettes were an inferior good it would mean that as a person’s income went up then their demand for cigarettes will go down. Income elasticity of demand measures the effect on the demand for cigarettes. This demonstrates that when all other things remain equal, ceterus paribus, and only the person’s income goes up then the demand for cigarettes will also go up. Other independent variables that describe the determinants of demand may be fashion and compliments.

Consumers may smoke because it is what everybody else is doing, or even that celebrities are doing it. It is believed that models smoke to keep themselves thin therefore it is believed female smokers are influenced. Alcohol and drugs may be seen as goods from which smoking is derived from. Therefore as long as there are drinkers and drug takers there will always be, according the derived demand concept, demand for cigarettes. All of these independent variables can be expressed as a formula to describe the demand on the dependent variable, cigarettes: D cigarettes = f(P cigarettes, I, P compliments, P substitutes)

1: BBC. CO. UK “Tobacco trend for high income countries demonstrating that the consumption had increased from 27000 cigarettes to 30000 per annum. 396 QB The taxes a smoker faces in the UK are VAT and Tobacco duty. The government believe that cigarettes should be heavily taxed due to the negative externalities associated with its consumption. “The cost of smoking one pack of cigarettes in term of value to life lost is $35. Koszegi and Gruber ‘New economics of smoking 2003’ Economic theory suggests that if a good is taxed its consumption will decrease.

The effect tobacco duty which is 20% of the price of cigarettes “Ash. org. uk 2002 basic facts on smoking” will have on consumption depends on the elasticity of the demand. If demand is elastic then the change in price for cigarettes would create a greater change in quantity demanded. However if the demand curve was to be inelastic then an increase in price would lead to a smaller change in QD. This theory can be used to show how much of the tax consumers and producers pay.. Consumers under this diagram would pay less then producers.

However, both consumer and producer see a reduction in surplus. When the output of cigarettes is restricted to less then the ‘optimum efficient level’ under perfect competition you create the ‘dead weight loss’. The cigarette market in the UK has no close substitutes. If you were to get an amount of utility from smoking then that utility may not be gained from another good. Therefore taxes will not have much affect in the short or long term. This is because consumers can not substitute their need for cigarettes for anything else.