Question

1. Examine the table below showing the price elasticities of demand for tobacco products.

Households by Income Group	Elasticity of Smoking Participation	Conditional Demand Elasticity	Total Price Elasticity of Demand
The Poorest	-0.51	-0.60	-1.10
Poor	-0.41	-0.58	-0.99
Middle Income	-0.39	-0.46	-0.85
Upper Middle	-0.41	-0.36	-0.77
Rich	-0.45	-0.37	-0.82
Total	-0.40	-0.47	-0.87

Source: Onder and Yureki, 2006

Let’s first understand how to use the table by looking at the price elasticity of demand overall for tobacco users, the last row of the table entitled “Total.” The total price elasticity coefficient is -0.87. The coefficient is negative since higher tobacco prices result in less quantity demanded, ceteris paribus. So for example, a 10 % increase in tobacco taxes would reduce the quantity demanded by 8.7% overall. Within this 8.7% reduction in quantity demanded, 4% would quit altogether (Elasticity of Smoking Participation coefficient) while the quantity demanded would fall by 4.7% among those who keep smoking (Conditional Demand Elasticity).

Health advocacy groups during the last session of the Montana Legislature proposed raising the state’s tax on cigarettes by $1.50 per pack to boost it to $3.20 a pack. The purpose of the tax was two-fold; to reduce tobacco use and to raise badly needed tax revenue for programs suffering budget cuts and administered by the Montana Department of Health and Human Services. Also, the price elasticity of demand for tobacco products by youth is -1.2 (not shown).

1. Identify the demographic groups who will most respond to higher tobacco prices and offer an explanation why they respond the way they do.
2. If the primary purpose is to raise badly needed revenue for other programs cut by the Montana Legislature, what demographic will raise the most revenue for the government?
3. If you want to encourage smokers to drop the habit altogether, which demographic group would likely respond the most to the higher price of tobacco products by quitting the habit entirely?
4. How would all elasticities likely change in the long-run? Why?

Answer 1

A ) IN MOST DEVELOPED COUNTRIES , BUSINESSES USE A BROAD VARIETY OF MARKETING TECHNIQUES TO INCREASE THEIR SALES GAIN MARKET SHARE ATTRACT NEW USERS AND RETAIN EXISTING CUSTOMERS. THESE TECHNIQUES INCLUDE PRODUCT DESIGN , PACKAGING , PRICING, DISTRIBUTION, PRODUCT , PACAKAGING , PRICING DISTRIBUTION PRODUCT PLACEMENT ADVERTISING AND A VARIETY OOF PROMOTIONAL ACTIVITIES .

TOBACCO COMPANIES WERE AMONG THE EARLIEST COMPANIES TO IDENTIFY AND IMPLEMENTS

B) IF THE PRICE RAISE THEN THE DEMAND OF TOBACCO WILL FALLEN DOWN FOR SURE BECUASE MANY OF THEM WILL NOT ABLE TO PURCHASE THE TOBACCO THEY WILL THINK BEFORE THEY BUY SO YES IT WILL NE THE GOOD STEP IF THE PRICE WILL GET RAISE

AND IF NOT THEN THE YOUTH AND MANY PEOPLES WHO CONSUME TOBACCO WILL SUFFER FROM CERTAIN PROBLEMS

C ) FIRST SET A QUIT DATE LIKE CHOOSE A DATE WITHIN THE NEXT TWO WEEKS SO YOU HAVE ENOUGH TIME TO PREPARE WITHOUT LOSING YOUR MOTIVATION TO QUIT.

LET YOUR FRIENDS AND FAMILY IN ON YOUR PLAN TO QUIT SMOKING AND TELL THEM YOU NEED THEIR SUPPORT AND ENCOURAGEMENT TO STOP .

MOST PEOPLE WHO BEGIN SMOKING AGAIN DO SO WITHIN THE FIRST THREE MONTHS.

D) DEMAND ELASTICITY IS THE SENSITIVIRY OF THE DEMAND FOR A GOOD OR SERVICE DUE TO CHANE IN ANOTHER FACTOR. ECONOMISTES MEASURE DEMAND ELASTICITY TO DETERMINE HOW CONSUMER BEHAVIOUR AND SPENDING PATTERNS ARE AFFECTED WHEN SPECIFIC FACTORS ARE CONSIDERED.