Economic Theory: Demand for Cigarettes and Price Elasticity

Running head: ECONOMIC THEORY 1
Economic Theory
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ECONOMIC THEORY 2
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