Cigarette Market of Australia

Running head: ECONOMICS FOR BUSINESS
Economics for Business
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ECONOMICS FOR BUSINESS1
Realizing the adverse consequences of consuming cigarette government in different
countries introduce a tax on cigarette. The current essay researches demand and supply concepts
related to cigarette market of Australia and consequences of an excise tax imposition on
cigarette.
Demand
The economic definition of demand states that demand is the desire of the consumers’
group to purchase certain goods and services backed by their purchasing power reflected in their
willingness of pay.
Demand curve explains how price is related to quantity demanded of the good. It is
drawn following the principle of demand which asserts that given all the factors than can
influence demand, surge in own price of the good lowers quantity demanded of the good while a
decrease in price general increases demand for the good (Mankiw 2020). Therefore, when
cigarette’s price hikes, quantity demanded of decreases. This is reflected by a movement towards
upward direction of the demand curve. When price of Cigarette falls demand for cigarette
increases and accordingly a downward movement occurs along the demand curve.

ECONOMICS FOR BUSINESS2
Figure 1: Effect of price change of cigarette
In figure 1, as price upsurges from P* to P1 demand falls from Q* to Q1. Consequently
point on the demand curve moves from A to B. Following a decrease in price in cigarette from
P* to P2, demand increases from Q* to Q2 causing point on the demand curve to move downward.
Apart from prices there are other factors that influence demand for cigarette. These
factors include income of consumers, price of substitutes, advertising and social awareness
campaign. Changes in these factors shift the demand curve of cigarette to a new curve.
Income
For smokers’ cigarette seems to be a normal good. Therefore when income increases
there is greater tendency to consume more cigarette as this increases willingness and ability to
but cigarette even at a high price. This increases demand for cigarette. Demand for cigarette falls
when there is a fall in income.
Price of substitutes

ECONOMICS FOR BUSINESS3
If the price of substitutes such as electronic cigarette, cigar and other tobacco product
increases demand for cigarette increases. On the other hand, when price of these substitute falls
demand for cigarette falls (Ajjandaleh et al. 2017).
Advertising
Effective advertisement may influence people to forgo other substitutes of cigarette and
consume more cigarette. This increases demand for cigarette.
Figure 2: Increase in demand of cigarette