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Profit from Smoking

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By: Sharon White

Smoking makes someone very successful nowadays. Let’s examine determinants of demand and profit from Cigarette industry. One of the most important factors of demand is ‘price’. Price in fact is a fundamental law of economics that embodied the downward sloping demand curve. In relation to cigarettes it can be said that as the price of cigarettes increases the demand for them decreases, however the change in demand will be less than the change in price as cigarettes are price inelastic due to their addictive nature. The reason why demand may fall even if by a small amount could be due to the fact of “higher tobacco taxes reduce smoking and smoking related sickness as people cut down, stop smoking, or never start because of the high cost” (ASH (undated) basic facts no.3: smoking and economics).

The price of cigarettes can be interlinked with another determinant of demand, which is the price of substitutes and supplements. As the price of cigarettes increases (this means the price of all brands of cigarettes generally increase) the demand for substitute goods will increase, however there are not many substitute goods for cigarettes other than cigars, but cigars are generally more expensive than cigarettes. Thus as price of cigarettes increases the change in demand will fall but less than the change in price due to it being price inelastic as mentioned before. Another determinant of demand is income. “As peoples incomes rises, their demand for most goods will rise” (Sloman fifth edition page 32). In this case as the income of consumer raises so does the demand for cigarettes as an extra proportion of their income can be spent on buying more cigarettes. However if consumer’s income decreases the quantity demanded decreases by a smaller percentage than price. Lastly another determinant of demand that is relevant for cigarettes is taste. Taste as a determinant is extremely important in relation to demand.

If cigarettes are heavily advertised which it has been in recent years demand for cigarettes will increase, for example, advertising was so successful for cigarette companies that the tobacco industries “in the mid 1990s it was estimated that around £50 million was spent on advertising cigarettes in the press and £15-20 million on posters” (ASH (undated) basic facts no.3: smoking and economics). However cigarette advertising is now banned and “in 1992, a report for the Department of Health demonstrated that bans on advertising had produced significant drops in consumption in four countries.” In conclusion it is fair to say that certain determinants of demand have a greater impact on the demand for cigarettes and some determinants have a lesser impact for example demand will vary significantly with taste but not with other determinants such as price or price of substitutes and supplements. Sales (‘excise’) taxes on cigarettes, which are set by customs and excise, are known as indirect taxes. “It is a tax on the expenditure on goods. Indirect taxes include value added tax (VAT) and duties on tobacco, alcoholic drinks and petrol”. The way the government tax cigarettes is by a fix amount per unit sold, which is known as a specific tax.

The article was produced by the member of masterpapers.com. Sharon White is a 5-years experienced freelance writer and a senior manager of dissertation writing services support team. Contact her to get custom term paper tips and buy dissertations.

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