Roger Soto

Microeconomic 2010
Prof. Ike
4/26/15
Price Elasticity of Tobacco (Cigarettes)
Pricing has long been the key factor of marketing strategies throughout the business
world. Businesses are carefully focused on setting prices either to increase or decrease,
according to the demands of the consumer. However, setting prices plays a risky role in the
ability to make profit. Price elasticity, an economic theory, has been fundamentality the guiding
wheel for any form of business. In order for a business to operate, revenues need to exceed
costs, resulting in dealing with the dangerous game of price setting.
Its quite simple; increasing or decreasing the price of a commodity can either reduce or
increase the demand for that commodity. Consumers sensitivity measures the demand of price
elasticity. Nonetheless, elasticity varies among products. Products that are considered
necessities are more unresponsive to price changes as consumers will continue to buy these
products despite the increase of price. On the other hand, products that are considered luxuries
becomes less desirable as price increases because the opportunity cost of buying that product
will be too high. Luxuries products for consumers are most likely not a necessity because
consumers have the availability for substituting that product for a cheaper price.
A good or service can be either elastic or inelastic. If a good or service is elastic even the
smallest change in price can cause an acute change in quantity demanded and supplied.
Usually these kinds of goods and services are easily attained in the market and a consumer
may not need them in their daily lives. If a good or service is inelastic such as tobacco, the
changes in price have a slight change in quantity demanded. Now these types of goods, are
tend to be more of an obligation for consumers because they feel like they need these goods for

their daily lives. This obligation for the consumer satisfies their needs and wants, almost forcing
the consumer to psychologically demand for more of the same good.
According to Cancer Council if the price elasticity of a product is inelastic or is about -0.1
then the demand for that good will fall by only 0.1% for every 1% increase in price. Furthermore,
if the price elasticity of a product is elastic or -1.0 then the demand for that good will fall by 1%
for every 1% increase in price. In other words, if elasticity is greater than or equal to one then
its considered to be elastic. If its less than one, then its considered to be inelastic. The demand
curve is a negative slope but if the prices increase the quantity demanded will decrease making
the demand curve more horizontal or otherwise called elastic. In the meantime, inelastic
demand is represented with a more upright curve as quantity merrily changes with a broad
movement of price.
Usually when the price of a product is raised, the demand for the product declines.
However, this economic theory does not seem to apply to cigarettes or tobacco consumers.
Cigarettes are continuing to be in high demand no matter how much their prices increase. The
demand for cigarettes has been distinctly inelastic making tobacco industries go nuts over their
profits because consumers will still buy the product no matter the price change. At this point,
smoking cigarettes have become a serious problem for consumers in many aspects but most
importantly their health.
According to CDC more than 16 million Americans are living with a disease caused by
smoking. For every person who dies because of smoking, at least 30 people live with an illness
relating to serious smoking. These numbers are incredibly high as it shows how much tobacco
people consume in America. Not only in America but worldwide as well. According to CDC
tobacco use causes nearly 6 million deaths per year, and trends show that by the year 2030 8
million more people will continue to die annually because of the same reason. Cigarette

smoking is sadly a form of addiction that cant be easily withdrawn from. This drastic habit
causes consumers to find smoking as a necessity of their everyday lives resulting in consuming
almost the same number of packs and sticks of cigarettes even though prices may rise.
Consuming tobacco is an imperfectly rational addiction making cigarettes inelastic.
People want good health and a long life but far away from their far-sighted life goals appears
another side of their personality that simple adores smoking. With having such an addiction,
raising prices for cigarettes can only cause a slight change of their behavior. After all, with time
consumers behavior will return to normal as they will continue to buy cigarettes.
Substitution notwithstanding is an important factor of influencing the elasticity of a good
or service. In this case, consumers may turn to other tobacco products as a substitute for
cigarettes. However, most consumers may not have the desire to substitute their wants for
cigarettes. Most consumers will continue to pay for cigarettes despite having to pay a higher
price.
People may argue to just increase the prices of tobacco so that consumers may stop
buying the product. However, price changes all comes down to the businesses decision. The
ultimate goal for a business is to make profit; so if a consumer is going to their competitor to buy
cigarettes because there cheaper, then the original business who rose their prices will decrease
their prices as well. This shows how much of a necessity cigarettes have become over the
years. Smoking not only causes deaths but it costs the U.S billions of dollars every year. The
total economic costs of smoking is almost $300 billion a year and the leading costs are directly
of medical care for adults and the loss of productivity due to premature death and exposure to
second hand smoke (CDC).
Having cigarettes as an inelastic product produces steady profits for industries. Having
high profits tobacco industries spend billions of dollars each year in advertising and promoting.

(CDC) In 2012, $9.17 billion was spent on advertising and promotion of cigarettes. A resolution
proposed by Mr. Marcelino (Octaviano) is having a high price increase by raising the tax. This
may cause a consumer change of behavior because if the current tax rate of cigarettes is
increased by 50%, and if producers will shift the tax to higher prices, then the price of cigarettes
per pack may also increase by 50%. This solution may lead for industries to focus their money
more on making the product instead of wasting their money on advertising. Therefore, the
money the government makes with increasing the tax on cigarettes may be used to build more
hospitals.
Also, with having a tax increase it may discourage non-users from starting. It can
encourage smokers to eventually quit because the price exceeded their demand. Likewise it
further prevents those who already quit smoking to start again. Adding a tax for cigarettes will
have a price effect on everyone resulting in reductions of tobacco use across the whole
population of America.
Price elasticity, a measure between demand and price is a vital economic theory when
dealing with product sales. Businesses are in control in setting their prices as they will charge
higher if the product is typically inelastic. There is no doubt that price applies to a subtle impact
in the consumption of cigarettes. Reducing consumption can be heard of among this perfectly
inelastic good. According to Mr. Marcelino charging a higher price tax on cigarettes will not only
reduce economic cost but also make an effort in benefiting a healthier society as a whole.

Work Cited
Octaviano, Trishia P. "Why Is Demand for Cigarettes Inelastic?" Popular Economics:.
Business World Research, 12 Apr. 2013. Web. 26 Apr. 2015.
"Price Elasticity of Demand for Tobacco Products." Tobacco in Australia. Chapter 13.,
Cancer Council, N.p., 2015. Web.
"Fast Facts." Centers for Disease Control and Prevention. Centers for Disease Control
and Prevention (CDC), 24 Apr. 2014. Web. 26 Apr. 2015.