The Impact of Price and Tobacco Control Policies

Question: Discuss about the Impact of Price and Tobacco Control Policies. Answer: Price elasticity of demand Price elasticity of demand measures the economic relationship between the changes in quantity demand for a product and the change in its price to define the price sensitivity. It is measured by considering the percentage change in demand and percentage change in the price of such product (Thimmapuram Kim, 2013). Accordingly, if the percentage change on price of the product is small against the high percentage change in demand of product quantity, then the product is said to have price elasticity of demand. On the other hand, if the percentage change on price of product is high while the percentage change in quantity demand is low then the product is not responsive to the price change and regarded as inelastic (Coglianese et al., 2016). For the products like tobacco or cigarettes, product is not responsive to the change in price since, consumption level of tobacco is not affected at high percentage due to increase in its price. As the individuals are addicted to consume tobacco, change in price does not affect the consumption level hence price elasticity for the product reflects less than one and the product is said to be relatively inelastic (Lin Prince, 2013). Similarly, cigarette products fall in the same category as the product is consumed by people out of addiction hence, increase in price due to increase of duties and taxes does not decrease the consumption level at large. Products Percentage change in quantity demand percentage change in the price Price elasticity of demand Addictive product (tobacco/ Cigarettes) 5% fall 16% increase 0.31 Substitute products (soup, chocolates) 70% decrease 20% increase 3.5 Luxury products (Smartphone) 35% increase 15% fall 2.30 In case of products having substitute products, price elasticity of demand represents change in consumption level at high percentage due to change in price structure (Huang, Tauras Chaloupka, 2014). In case of appetizer product for instance, Heinz soup, demand for the product consumption will fall at large if the price of soup rises because the product has several substitute products and consumers will switch to cheaper variety of products. Considering the graph, it can be noted that if the rise in price of Heinz soup amounts to 20% whereas the decrease in demand of the soup is 70%, then the price elasticity of demand for soup is 3.5. Similarly, for the chocolate products, if price of dairy milk rises, consumption will fall at higher rate as there are several alternatives for chocolates hence, the price elasticity of demand for chocolate is said to be elastic. On the contrary, price elasticity for luxury products is positive because if the price of electronic goods for example, smart phones, decreases, demand for the product will be elastic at 2.30 higher than one. Due to price decline, consumption level will increase at high percentage and the product will be responsive to the change in price (Coglianese et al., 2016). In view of the above table, it can be said that the price elasticity of demand is affected by the determinants of consumers income and necessity other than the substitute goods. References Coglianese, J., Davis, L. W., Kilian, L., Stock, J. H. (2016). Anticipation, tax avoidance, and the price elasticity of gasoline demand.Journal of Applied Econometrics. Huang, J., Tauras, J., Chaloupka, F. J. (2014). The impact of price and tobacco control policies on the demand for electronic nicotine delivery systems.Tobacco control,23(suppl 3), iii41-iii47. Lin, C. Y. C., Prince, L. (2013). Gasoline price volatility and the elasticity of demand for gasoline.Energy Economics,38, 111-117. Thimmapuram, P. R., Kim, J. (2013). Consumers' price elasticity of demand modeling with economic effects on electricity markets using an agent-based model.IEEE Transactions on Smart Grid,4(1), 390-397.