Price Elasticity of Demand Essay Sample
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Price Elasticity of Demand Essay Sample
What can we say about the price elasticity of demand for nicotine products (such as cigarettes, pipes, tobacco) in the group of nicotine addicted users, versus the group of “social smokers”? Price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price. (Douglas, E., (2012) sec. 4.2) The price elasticity of demand is the same for addicted users and social smokers. Smoking is an expensive habit. In Mississippi where I live tax on a pack of cigarettes increased to $1.02 in 2009. When the tax on a pack of cigarettes increased my friends who are social smokers didn’t complain as much as my friends who were addicted smokers. Social smokers are in a higher price elasticity category than those who are addicted smokers. “The relative responsiveness of quantity demanded to changes in the price level, for a particular product. It allows an estimate of by what proportion demand is likely to change when an item’s price is increased or decreased by a particular proportion.” (Douglas, (2012)
In terms of elasticity and inelastic both describe how shift demand or supply for a certain goods it is elastic. Addicted nicotine users are considered inelastic while social smokers are considered elastic. When a price change results in little or no change in the level of supply or demand, the good is inelastic. The effectiveness of government policy aimed at reducing the negative effects of smoking on health. One of the Government’s justifications for its attempt to reduce smoking is by increasing the price of a packet of cigarettes to reduce the number of smokers. Local cities and townships are banning smoking in certain areas such as all state and local government offices and restaurants. As stated before increasing the tax on cigarettes has help some smokers to stop smoking but there could be more done.
Douglas, E. J. (2012). Managerial Economics, San Diego, CA: Bridgepoint Education, Inc.
Since now we know what price elasticity of demand is we can apply it to the scenario. Increase in prices has an effect on both addicted and “social” smokers. Even addictive smokers tend to cut back on smoking when prices increase. A lot of people cannot afford that habit anymore with the increase in taxes or they do not want to deal with all the new laws and regulations pertaining to smoking. “Social” smokers can quit a lot easier or reduce smoking a lot quicker than addicted smokers. “Social” smokers’ price elasticity is higher than of the addicted smokers which is more inelastic. Just because it is inelastic does not mean that demand is not affected by the change. Tauras published a study in 2004 stating that price elasticity for cessation of -0.35, suggesting that an increase in prices and other regulations are effective ways of the government to encourage cessation (Scollo, MM and Winstanley, MH, 2012, sec. 13.1).
The reason for the elasticity of addicted smokers is lower is because the addiction. It is hard to break an addiction and some people can never get rid of that addiction. Whereas “social” smokers only smoke in certain setting which they can either reduce or not smoke at all. Most of the time “social” smokers do not buy tobacco products any way, they just get a cigarette from a friend. The government can influence a smoker’s habit tremendously by limit them to places to smoke. A lot of people reduce smoking because of that. They believe it is not worth it to go to a designated smoking area all the time to smoke a cigarette. Also, increasing taxes can hurt people’s wallets because they cannot afford to constantly buy new packs.
Moffatt, M. (n.d.). Price elasticity of demand. Retrieved January 30, 2012, from http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm
Scollo, M. M., & Winstanley, M. H. (2012). The pricing and taxation of tobacco products in Australia. In Tobacco in Australia (4th ed., Ch.13.1). Retrieved from http://www.tobaccoinaustralia.org.au/chapter-13-taxation/13-1-price-elasticity-of-demand-for-tobacco-produc Price elasticity of demand (PEoD) depicts the rate of demand of a product due to a price change (Moffatt, M., n.d.). The formula for PEoD is:
PEoD = (% change in quantity demanded) / (% change in price). According to Moffatt (n.d.),
If PEoD > 1 then Demand is Price Elastic (Demand is sensitive to price