Tobbacco Essay example

1754 Words Sep 16th, 2014 8 Pages
JUNE 9, 2013
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This blog will discuss the market of tobacco products through the applications of economic tools and analysis. To analyse the market, we will examine the price elasticity demand and income elasticity demand of tobacco products the factors affecting each of these and the externalities caused by this product. Further, to explore further into the tobacco market, this blog post will discuss the theory of Rational Addiction, which contributes greatly to tobacco consumption.

A. Elasticity of tobacco products

Before analysing the elasticity of the tobacco market, it is important to know the fundamentals of elasticity.

To start, elasticity refers to the degree of change of the demand or supply of a
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II. Determinants of price demand elasticity

The price elasticity of demand varies from one product to another. But why? To answer this, we have to look at the determinants of elasticity.

The most important determinant of price demand elasticity is the number and closeness of substitute goods available in the market. A large number of close substitutes for a good would see that consumers switch to these other alternatives products given a price increase. Therefore, the price elasticity of demand is greater as there would be a large change in quantity demanded of the original product as consumers purchase alternative substitutes.

The income effect also plays a role in affecting price demand elasticity of a product. The income effect refers to the proportion of income spent on a good. The higher the proportion of a consumer’s income is spent on a good will see a very large decrease in the quantity purchased should there be any price increase in the good. Thus, a big income effect sees that demand becomes more elastic.

Time is another influential factor. Any price increase in a product will not have a significant effect on the quantity demanded in the short run. This is because people need time to adjust their consumption pattern and to try find cheaper alternatives to the product. Thus, demand is likely to become more elastic as people discover cheaper alternatives to purchase or change

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