Case Study in Demand Elasticity The Market for Cigarettes

Case Study in Demand Elasticity

The Market for Cigarettes

Cigarettes: Effect of Price Increase on Demand

0

D1

$/pack

Packs/day (millions)

A

C

20

$2.00

$4.00

15

2012 Cigarette Prices (US$)

USA (Virginia)

Spain Italy Holland France Singapore Canada USA (New York)

Australia Norway0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

4.56

5.996.48

7.12

8.31 8.60

10.51

12.50

13.50

15.50

http://www.tobaccoatlas.org/costs/cig_prices/prices/

Cigarette Prices Around the World

US Cigarette Price vs. Consumption

Price/pack

Billions of packs/year

0.261.43

37.

1.751.75) - (4.25

2727)(17

P%

Q%

Estimating US Demand Elasticity for Cigarettes

Year

19702007

Price($2007/pack)

$1.75 $4.25

Quantitybillions of packs/year

27 17

Prohibition Against Cigarette Advertising

Exceptions

Anti-Smoking Adveritising

IN FRANCE

IN ITALY

Cigarette Packaging in Canada

Anti Smoking Laws

Legal Age– Spain, Holland: 16 – France, Italy: 18

Anti-Smoking Laws

Scope of Anti-Smoking Campaign: Shift Demand Curve

0

D1

Price/ pack

Packs per day(mill)

D2

Decrease in demand

Scope of Anti-Smoking Campaign: Flatten Demand Curve

0

D2

$/pack

Packs/day (millions)

D1

If the demand curve is flatter (more elastic) the same increase in price will case a greater reduction in demand

References

http://www.tobaccoatlas.org/costs/cig_prices/prices/

http://www.hc-sc.gc.ca/hc-ps/tobac-tabac/legislation/label-etiquette/graph/index-eng.php

http://www.imf.org/external/pubs/ft/fandd/1999/12/jha.htm

http://www.cdc.gov/tobacco/data_statistics/tables/economics/trends/index.htm

http://tobaccocontrol.bmj.com/content/11/suppl_1/i62.full