Tobbacco

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Submitted By himanshuk
Words 1750
Pages 7
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 product in response to change in price of the product. The elasticity of products varies because consumers may find some products more essential than others. A good or service is considered to be highly price elastic if a price increase leads to a sharp change in the quantity demanded or supplied. Conversely, the demand and supply of price inelastic goods or services sees modest changes with any change in price. In most countries, the price elasticity of demand for tobacco products is fairly inelastic. This will be discussed further below.

I. Calculating price demand elasticity

To determine the price demand elasticity of a product’s demand curve, the following equation can be used.

Elasticity, Ped = (% change in quantity / % change in price)

If the elasticity value we obtain from the above formula is greater than or equal to 1, the demand curve for that product is considered to be elastic. On the other hand, if the value happens to be less than 1, the demand curve is inelastic.

Figure 1: An elastic demand curve. where a large decrease of quantity, Q would change due to any slight changes in P, Price. Can be shown by the…...

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