Price Elasticity of Demand for Tobacco, Starbucks Coffee, and Oil

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Course ID

1ECONOMICS
Table of Contents
Question 1..................................................................................................................................2
Price elasticity of demand......................................................................................................2
Question 2..................................................................................................................................6
Monopoly of Australian post.................................................................................................6
Inefficiency of monopoly and need for government intervention.........................................7
References................................................................................................................................10
NAME, STUDENT NUMBER

2ECONOMICS
Question 1
Price elasticity of demand
In economics, price elasticity of demand is an estimate for measuring relative
responsiveness of quantity demanded of a good for a given change in price of the product.
Demand does not always respond in the same way for a given change in price. For some
goods magnitude of change in demand is larger than the magnitude of change in price. This is
a case of relatively elastic demand and estimated elasticity of demand in this case is greater
than 1. For some goods on the other hand, change in quantity demanded is relatively smaller
than the given change in price (Kreps, 2019) This a case of relatively inelastic demands and
measured price elasticity of demand in this case is less than 1. Whether demand is elastic or
inelastic that depends on behavior of consumers and nature of the good.
Price elasticity of demand= Percentage change∈demand
Percentage change∈ price
The section discusses price elasticity of demand for three different goods in reference
to three different published article.
Tobacco
The first product chosen for discussion is Tobacco. The article published on official
website of cancer council of Australia discusses the price elasticity of demand for Tobacco
products. As stated in the article, price elasticity of demand for tobacco product in most
nations is found to be relatively inelastic in nature. That means measured price elasticity of
demand is less than 1 indicating percentage change in demand for tobacco products are
generally less than corresponding percentage change in price (Bickel et al., 2017). The
demand for Tobacco products are found to be relatively less elastic as compared to other
consumers’ product. Continuous research in this area has suggested that there is only a
moderate decrease in the demand for tobacco products in response to an increase in price
followed by a moderate decrease in both percentage of people who smoke and that of the
number or amount of tobacco consumed by the remaining smokers. Research on high income
countries shows that average price elasticity of demand for tobacco product in -0.4
(tobaccoinaustralia.org.au, 2019). This implies for 10 percent increase in elasticity results in a
decline in tobacco consumption by 4 percent. In case of UK and US, the price elasticity of
demand lies in the smaller range from -0.2 to -0.6.
NAME, STUDENT NUMBER

3ECONOMICS
Figure 1: Inelastic demand curve for Tobacco
(as created by author)
The demand curve for tobacco products is shown as DD. Because of relatively
inelastic demand, the demand curve is relatively steep. In the above figure, an increase in
price of tobacco products from P0 to P1 reduces demand for concerned product from Q0 to Q1.
As clearly indicated from the figure, the proportionate increase in demand is less than the
proportionate change in price.
There are different factors that influence the behavior of tobacco consumption and
hence, elasticity of demand (Cowell, 2018). The addictive nature of tobacco product makes
the demand inelastic. People are highly addictive to nicotine content and hence, are unable to
reduce demand even for a large increase in price. Price elasticity of demand also varies across
different age group. Young adults and teenagers are relatively more sensitive to a price
change on tobacco products compared to older adults both due to lower earning and smoking
habits (Gibson & Kim, 2019)
Starbucks coffee
The second product chosen for analysis of elasticity is Starbucks coffee. Published
article on demand elasticity of Starbucks discusses circumstances both when Starbucks coffee
seems to be relatively elastic and when coffee demand is relatively inelastic. The analysis us
NAME, STUDENT NUMBER