Economic Theory: Demand for Cigarettes and Price Elasticity

This article explores the law of supply and demand in economic theory and its impact on the demand for cigarettes. It discusses the price elasticity of demand for cigarettes and the effects of taxation on consumption. It also examines the determinants of consumer demand for cigarettes and the role of prices across different population groups.

Running head: ECONOMIC THEORY 1
Economic Theory
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Introduction
In economic theory, the law of supply and demand is an important principle that explains
that when the price of a good increase, the demand for the same good will reduce and vice versa.
It also explains that as the demand increases the price of the goods will increase. The demand for
cigarettes has significantly reduced in recent years. This is attributed to the control measures that
have been implemented in most of the countries. Measures such as taxation have led to a rise in
the price of cigarettes resulting in a decline in percentages of cigarette smokers and the number
or amount of cigarettes the remaining smokers consume.
Percentage of people who smoke cigarettes
The demand for cigarettes has changed over time with a significant decline in the people
using the product. This is due to the application of measures such as taxation leading to a rise in
the price of cigarettes. According to the World Health Organization, about 1.1 billion individuals
smoked tobacco in 2015. This represented about 20% of the world’s population in 2015. An
estimated 800 million of the smokers were found to be men and hence indicating that they are
the most prevalent to smoking. Although the rate of cigarette smoking has reduced in many
countries in the world, it remains high in the developing countries and the African and
Mediterranean region (World Health Organization 2015).
Approximately 80% of smokers live in countries with low and middle incomes. In 2014,
China was found to be the leading country in cigarette smoking where it produced and consumed
over 30% of the cigarettes in the world. The ratio of male to female smokers in the country was
high reportedly at 74% and 5% respectively. More than half of the males living in Indonesia and

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Bangladesh are smokers while the prevalence among women is quite lower (World Health
Organization 2015).
The smoking prevalence has significantly reduced from the mid-1990s where some
countries enacted the tobacco control policy. However, there has been a rise in the number of
people who smoke from about 721 million in 1980 to 967 million in 2012. In most western
countries this habit is common among individuals with alcohol and drug problems, mental health
problems and criminals. In 2002, teens aged 13-15 were active smokes worldwide. About 80,000
to 100,000 children are introduced to smoking daily. Half of the adolescents who start smoking
while in the adolescent years are expected to continue smoking up to 15-20 years (Freeman et al.
2014, pp.183-192). The World Health Organization indicates that the mortality rates and disease
burden associated with smoking are high among the low income people. An estimated 1 billion
of smokers live in developing countries. In middle income countries, the rate of smoking had
risen by about 3.4% in the year 2002. In 2015, it was predicted that there will be an estimated 1.5
to 1.9 smokers (World Health Organization. Management of Substance Abuse Unit 2014).
The number of Cigarettes Consumed worldwide
An estimated 6.5 cigarettes are sold worldwide annually which means that about 18
billion cigarettes are used daily. In 2016, approximately 5.7 trillion cigarettes were smoked. The
rate of smoking has hugely reduced in many countries such as Australia, the United Kingdom,
and Brazil which have fully implemented stronger tobacco control regulations. The data on the
worldwide consumption of cigarettes are follows; in 1970, 1980 and 1990, 3.2, 4.4 and 5.2
billion cigarettes were smoked respectively. In 2000 and 2009, about 5.7 and 5.8 billion
cigarettes were smoked respectively. In 2014, about 5.8 billion cigarettes were used. In 2016

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and 2017 approximately 5.5 and 5.4 billion cigarettes were smoked respectively (Tauras, Pesko,
Huang, Chaloupka, and Farrelly 2016).
Price elasticity of demand for cigarettes over time.
Due to the addictive properties of cigarettes, some researchers speculate that the price
elasticity demand for cigarettes is inelastic meaning that huge fluctuations in the price result in
little changes in the amount of quantity demanded. However, the trend in the reduction of
smoking with an increase in prices indicates that cigarette smoking is responsive to prices.
Although the demand for a cigarette seems not to be elastic as other products are, an increase in
the price for a cigarette can result to a significant drop in the people who smoke as well as the
number of cigarettes that the remaining smokers can use (Kostova et al. 2015, pp.279-288).
The percentage of the smokers tend to decline due to tax increases which discourage non-
smokers from smoking, encourages the smokers to quit the behavior and discourages the former
non-smokers from starting again. The fact that increased taxes for cigarettes results to an
increase in the price for everyone, the effects of even a slight reduction in smoking can be very
high among the whole population (Chaloupka, Hu, Warner, Jacobs and Yurekli 2015)
Many studies have pointed out that depending on the level of the price increase; there
will be a decline in the use of cigarettes as a result of high taxes. A study by the World Bank
indicates that with all other factors remaining constant, the change in the price of about 10% can
result in 4% and 8% in developed and developing countries respectively. Several studies have
also been conducted to evaluate on the price elasticity of cigarette and found out that an increase
in 10% in the price resulted in a decline in the consumption of cigarettes by 4.8% (Shang et al.
2019, pp.s31-s36). Studies also indicate that a massive increase in the price results to a rise in an

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individual’s interest to quit smoking. High prices can lead to a decrease in the use of cigarettes
among the remaining smokers by reducing their daily use. Studies show that although high prices
affect both the intensity and participation of adult smokers, it resulted to a reduction in the
smoking initiation among the youths (Harvey, Chadi, Canadian Pediatric Society and Adolescent
Health Committee 2016, pp.209-214).
According to the World Health Organization, the determinants of consumer demand for
cigarettes include the price of a cigarette. An increase in the price is most likely to result in a
decrease in the demand for cigarette and vice versa. Secondly, the disposable income of a person
will purchase a cigarette. A decline in the amount of disposable income will reduce the consumer
demand of the cigarette. Thirdly, the demographic characteristics of a population influence the
consumer demand for cigarettes. For instance, men are more prevalent to smoking compared to
women. The youths are also more prevalent to smoking compared to the elderly (World Health
Organization. Management of Substance Abuse Unit 2014). Fourthly, the socio-economic status
of a population has an impact on the consumer demand for cigarettes. For instance, smoking is
more common among people with low socioeconomic status compared to those with high
socioeconomic status (Kostova, Chaloupka and Shang 2015, pp.279-288).
The demand for cigarettes also depends on the present tobacco control
measures/interventions. For instance, the introduction of taxes is more likely to decrease the
demand for cigarettes (Hu, Mao, Shi and Chen 2016, pp. 149-168). The restriction of advertising
tobacco products can also lead to a decline in demand. Lastly, the level of information and
knowledge on the health effects of tobacco can impact on the demand for cigarettes. High level
of knowledge on the effects of tobacco can lead to a decline in the demand for cigarettes while
lack of knowledge can increase the demand (Hornik 2018, pp. 45-58).

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Price elasticity demand across population groups
The price elasticity demand tends to be different among different population groups. The
youths are more sensitive to prices compared to adults. The youths and teenagers often earn
lower wages and hence making them less dependent on cigarettes. A rise in the price of
cigarettes is more likely to discourage more youths from smoking as well as encourage smokers
to quit compared to the adults (MacLean Kessler and Kenkel 2016, pp.424-438). Research shows
that a rise in the price of cigarettes can discourage women from smoking as well as force
smokers to quit compared to men. An increase in prices is more likely to decrease demand
among people from low socio-economic status. This is because an increase in price will make
them stretch or work harder to get enough income to purchase cigarette. An increase in the price
of cigarettes can also make them unable to afford cigarette. A huge increase in cigarette price
among the people with the higher income is more likely to reduce consumption too (Husain et al.
2017, pp.S4-S9).
A policy that can impact on the price of cigarettes
An example of a policy that will impact on the price of the cigarette is an increase in the
taxation of the cigarettes to a level similar to that of industrialized countries. This is because a
rise in the tax will lead to a significant increase in the price of the cigarette. As a result, this will
force current smokers to quit. Secondly, it will result to a reduction in the number of containing
cigarette users. Thirdly, it will lead to a decline in the initiation of cigarette use among youths
and teenagers. Fourthly, it will discourage nonsmokers from smoking. Lastly, it will also ensure
that reformed smokers to stay quit. It will also ensure that occasional smokers do not turn into

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regular smokers. A high price of cigarette will also result in a decline in the consumption of
cigarettes among smokers (Verguet et al. 2015, pp.e206-e216).
Research indicates that income and price are the main determinants for the demand for
cigarettes. An increase in price results to a decline in the consumption regardless of the income
status. Also, an increase in income leads to a rise in cigarette use among people with low socio-
economic status. With increased income, cigarette consumer’s preference tends to shift too many
expensive brands (Ekpu and Brown 2015, pp.156-280). Research also shows that increase in
taxation with a significant increase in the price of tobacco by 20% can result to 14.8% and 7.4%
decline in demand among the youths and teenagers aged 13-29 and adults aged 30 and above
respectively. Secondly, it can lead to 3.6% and 7.2% reduction in the consumption of tobacco
among adults and youths respectively. Thirdly, it can lead to 8.6% decline in the cigarette use
initiation among the youths aged 13-29. Lastly, it can lead to 18.6% and 6.5% increase in
cigarette quitting among the youths and adults respectively (Shang et al. 2019, pp.s31-s36).
The use of taxes has been effective in increasing the price of cigarette as well as reducing
its consumption in countries such as Canada. Since 1985, there has been an increase in the
federal cigarette tax per 20 cigarettes from about 32 cents to $1.45 in 1992. Between 1985 and
1992, the provincial government also raised the taxes on cigarettes making the average tax on the
product to be $2.91 and the price of 20cigarettes then increased to 4.22 dollars. During the same
period, cigarette consumption dropped by 38%. The rate of smoking among young Canadians
aged 14 and above reduced between 1980 and 1989. The teenage smoking decreased by 52%,
from 45% to 22% (Cui, Forget, Zhu, Torabi and Oguzoglu 2019, pp.93-102). The number of the
older population who consume cigarettes declined by about 23% that is from 41% to 31%. This
report shows that the taxes resulted in a rise in the price of cigarettes and hence leading to a

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decline in its use. Therefore, prices of cigarettes is a major determinant of how much people
smoke and thus taxation is one of the best interventions (Farber, Pakhale and Neptune 2016,
pp.2115-2118).
In conclusion, even though cigarettes consumption has significantly reduced over the
years, the future path for global tobacco control is still uncertain. Although many countries are
committed to ensuring that the prevalence of smoking is reduced, many tobacco companies
continue to advertise cigarettes while aggressively fighting tobacco control measures. Therefore,
there should be an increase in the taxation of cigarettes to a level similar to that of industrialized
countries to reduce the consumption of the product.

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References
Cui, Y., Forget, E.L., Zhu, Y., Torabi, M. and Oguzoglu, U., 2019. The effects of cigarette price
and the amount of pocket money on youth smoking initiation and intensity in
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Ekpu, V.U. and Brown, A.K., 2015. The economic impact of smoking and of reducing smoking
prevalence: review of evidence. Tobacco use insights, 8, pp.156-628.
Farber, H.J., Pakhale, S. and Neptune, E.R., 2016. Tobacco 21: An important public policy to
protect our youth. Annals of the American Thoracic Society, 13(12), pp.2115-2118.
Freeman, M.K., Fleming, T.D., Robinson, M., Dwyer-Lindgren, L., Thomson, B., Wollum, A.,
Sanman, E., Wulf, S., Lopez, A.D. and Murray, C.J., 2014. Smoking prevalence and
cigarette consumption in 187 countries, 1980-2012. Jama, 311(2), pp.183-192.
Hornik, R., 2018. Public health education and communication as policy instruments for bringing
about changes in behavior. In Social marketing (pp. 45-58). Psychology Press.
Hu, T.W., Mao, Z., Shi, J. and Chen, W., 2016. The role of taxation in tobacco control and its
potential economic impact in China. In Economics of Tobacco Control in China: From
Policy Research to Practice (pp. 149-168).
Husain, M.J., Kostova, D., Mbulo, L., Benjakul, S., Kengganpanich, M. and Andes, L., 2017.
Changes in cigarette prices, affordability, and brand-tier consumption after a tobacco tax
increase in Thailand: Evidence from the Global Adult Tobacco Surveys, 2009 and
2011. Preventive medicine, 105, pp.S4-S9.

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Kostova, D., Chaloupka, F.J. and Shang, C., 2015. A duration analysis of the role of cigarette
prices on smoking initiation and cessation in developing countries. The European
Journal of Health Economics, 16(3), pp.279-288.
MacLean, J.C., Kessler, A.S. and Kenkel, D.S., 2016. Cigarette taxes and older adult smoking:
evidence from the health and retirement study. Health economics, 25(4), pp.424-438.
Shang, C., Lee, H.M., Chaloupka, F.J., Fong, G.T., Thompson, M. and O’Connor, R.J., 2019.
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effectiveness analysis. The Lancet Global Health, 3(4), pp.e206-e216.
World Health Organization, 2015. WHO global report on trends in prevalence of tobacco
smoking 2015. World Health Organization.
World Health Organization. Management of Substance Abuse Unit, 2014. Global status report
on alcohol and health, 2014. World Health Organization.

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Chaloupka, F.J., Hu, T.W., Warner, K.E., Jacobs, R. and Yurekli, A., 2015. The taxation
of tobacco products. In In: Jha, P.; Chaloupka, F.(Eds.). Tobacco Control in Developing
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2016. Preventing smoking in children and adolescents: Recommendations for practice and
policy. Paediatrics & child health, 21(4), pp.209-214.

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Appendix
(Cui, Forget, Zhu, Torabi and Oguzoglu 2019, pp.93-102).

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