Cigarette Industry

Cigarette 

There are many brands of cigarettes are available in the market such as Marlboro, Kent, Dun-hill, Hollywood and more. Cigarettes would bring a lot of negative impacts due to its chemical ingredient .Those impacts includes air pollution as cigarettes involves carbon monoxide and nitrogen oxide. Besides that, several diseases are caused by smoking such as lung cancer, bladder cancer and cause death. Even though cigarettes involve a lot of negative impacts, but there are still many people demand for it. Therefore, the cigarette industry is approving to the demand and supply concept.

Demand and Supply in Cigarette Industry

 Demand is consumer's desire and willingness to pay a price for a specific good or service (Bajada, C., John, J., Mclver, R and Wilson, E., 2012). The law of demand states that the higher the price, the lower the quantity demanded. It is result from substitution effect and income effect (Bajada, C., John, J., Mclver, R and Wilson, E., 2012). As the price of cigarette raise, then quantity demanded would be lower as the willingness and ability for smoker to pay for cigarette would decrease and they will seek for other substitution. The relationship between price and demand could be shown in demand curve.

The demand curve below show the relationship between price and quantity demanded, the movement along the demand curve is cause by the changes in price of the good itself.

There are few determinants for the demand of cigarettes such as expected future prices and income (Bajada, C., John, J., Mclver, R and Wilson, E., 2012). If the expected future prices of cigarette rise, current demand for cigarette would increase even though the current price is the same. In the other hand, when income increases, consumer has the ability to purchase more cigarettes. In addition, raise in income would raise the demand for better quality of cigarette but demand for inferior cigarette would decrease. Besides that, the determinants such as expectations of future price and income factor would make a shift in demand curve .According to The Star (2013), demand for cigarette has been increased before the BAT announces that the price of cigarette would increase 3%.  ( http://thestar.com.my/news/story.asp?file=/2013/6/2/nation/20130602203309&sec=nation) Therefore, the demand curve for the cigarette shift rightwards before BAT announces increase in price for cigarette. During economic inflation, the demand for inferior cigarette would increase as consumer income become lower because they have no ability to purchase better quality of cigarette. Therefore, the demand curve for better quality of cigarette during inflation would shift leftwards.

 The demand curve below has shown the demand curve shift when there is an increase or decrease in demand.

Besides that, supply is the total amount of a specific good or service that is available to consumers (Bajada, C., John, J., Mclver, R and Wilson, E., 2012). The relationship between quantity supplies and price are shown in supply curve. When the price of cigarette is higher, BAT would supply more in market in order to earn more revenues. There is a positive relationship between price and quantity supplies (Bajada, C., John, J., Mclver, R and Wilson, E., 2012).

The movement along the supply curve is determining by the price of the good itself (Bajada, C., John, J., Mclver, R and Wilson, E., 2012).

The shifts in supply curve are determined by any other determinant of supply such as the expected future price and the number of supplier in market (Bajada, C., John, J., Mclver, R and Wilson, E., 2012). Before BAT announce that the price for cigarette would increase, the supply before the price rise would decrease in order to supply more after the price rise in future and the supply curve shift leftwards. Besides that, the supply of cigarette is greater when there are many suppliers in the market; therefore the supply curve would shifts rightwards. The supply curve below has shown the supply curve shift due to decrease and increase of supply.

Elasticity of Demand for Cigarette 

Let’s move to the concept of price elasticity of demand for cigarette .Price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same(Bajada, C., John, J., Mclver, R and Wilson, E., 2012).

Demand inelastic occurs when the percentage change in quantity demanded is smaller than percentage change in price; elastic demand occurs when percentage change in quantity demanded is greater than the percentage change in price (Bajada, C., John, J., Mclver, R and Wilson, E., 2012).

There are few factors that would influence the elasticity of demand such as the closeness of subsides , the proportion of income spent on the good and the time elapsed since a price change ( Bajada, C., John, J., Mclver, R and Wilson, E., 2012). According to the British American Tobacco Malaysia (2013), the price of all cigarette brands would increase 3% as BAT Malaysia are facing inflationary pressures, labor and input costs, resulting in rising operating costs over time. Continuing high levels of illicit trade has impacts on legal tobacco industry sales volume (The Star, 2013). Therefore, BAT decided to increase 3% on the price of all cigarette brands in order to overcome mounting costs (The Star, 2013).(http://thestar.com.my/news/story.asp?file=/2013/6/2/nation/20130602203309&sec=nation)

The increase of cigarette price wouldn't bring too much impacts on quantity demanded for heavy smokers as they are addicted and it is hard for them to quit smoking. According to Zhang TingTing (2013), president Obama and President Christina Fernandez once a heavy smoker and they experiences to quit smoking due to some reason. Both of them agree that quit in smoking are hard once addicted. (http://www.china.org.cn/world/2013-06/03/content_29008502.htm)Therefore, the price elasticity of demand for heavy smoker is inelastic. According to The Star (2013), they had reported that BAT increases the price for all of the brands of cigarette such as Dun-hill Kent and Benson & Hedges.

(http://thestar.com.my/news/story.asp?file=/2013/6/2/nation/20130602203309&sec=nation) Heavy smoker aren't sensitive to the increase 3% of price for cigarette because they are heavy addicted and they can't switch to other brand since all the brands of cigarette has been increased price.

Oppositely, the price elasticity of demand for light smoker or new smoker is elastic because they are slightly addicted and can immediately quit smoking whenever the price is getting higher. Assumes that there is only one brand of cigarette increase price and all other remain constant, the price elasticity of demand would be elastic as every smoker able to switch to another brand to satisfy nicotine habit.

There are three factors would influence the elasticity of demand which is the closeness of substitute, the proportion of income spent on the good and the time elapsed since a price change (Bajada, C., John, J., Mclver, R and Wilson, E., 2012). For the cigarettes industry, there would be inelastic demand due to no close substitute for cigarette when there is an increase price for all brand of cigarette. The demand would be elastic when there are only one brand has been increased price because consumer might switch to another brand as substitute for the brand which the price has been goes up. Besides that, the proportion income that consumer spent on a good is refer total amount of a person that can be spend on a particular product or good (Bajada, C., John, J., Mclver, R and Wilson, E., 2012). The income effect will not affect the elasticity of demand curve for cigarettes because smokers are willing to purchase cigarettes due to addiction. Time is the third factor which influences the cigarette demand elasticity. If the price of packet of cigarette goes up by 3%, smoker with very few available substitutes will continue buying the cigarettes. It means that cigarettes have inelastic demand because the changes in price will not have a great influence on the quantity demanded but if the customer are not capable or can’t afford to spend for the cigarette after price raise, they will put effort to quit smoke .Therefore , customer price elasticity of cigarettes becomes elastic in the long run.

Taxation for Cigarette

 However, smoking is bad habit which would cause a lot of health problem even more serious when it cause death. 

Therefore, governments implement high tax on cigarette in order to lower smoking rate. According to British American Tobacco Malaysia (2004), cigarette price would increase when tax is implemented (http://www.batmalaysia.com/group/sites/BAT_7RYJ8N.nsf/vwPagesWebLive/DO7T5HCR?opendocument&SKN=1 ) If the price rises by full amount of the tax, buyers pay the tax. According to the The Star (2013) , BAT raise the price for all brands of cigarette to 3% , Dun-hill brand are now worth RM10.50 compare to the past for RM10.20 (http://thestar.com.my/news/story.asp?file=/2013/6/2/nation/20130602203309&sec=nation) Therefore , the price for RM10.50 is included the full tax that government charged. , so smoker has to pay for the tax.

Lastly , cigarettes has no advantages for us as it would affect our healthy and financial . Government has put effort on cigarettes industry in order to control the supply and demand of cigarettes in the market by implement tax and set price floor to make cigarette not affordable for most of the smoker. Due to the increasing price of cigarette , there has a lot of illegal retails are available in the market in order to take chance to supply cigarette at lower price compare to market price and earn profit from there.Therefore , cigarettes should be strictly controlled . 

Referencing List

Bajada, C., John, J., Mclver, R and Wilson, E. (2012) Economic Principals. Australia: McGraw Hill

British American Tobacco Malaysia (2004) New Tax Structure on Cigarettes Leads to Significant Retail Price Increase. [Online] Available from :< http://www.batmalaysia.com/group/sites/BAT_7RYJ8N.nsf/vwPagesWebLive/DO7T5HCR?opendocument&SKN=1> [Accessed on 7 June 2013]

The Star Online (2013) BAT Malaysia ups cigarette prices. The Star. [Online] 2 June. Available from :< http://thestar.com.my/news/story.asp?file=/2013/6/2/nation/20130602203309&sec=nation> [Accessed on 7 June 2013]

The Star, 2013. Ciggie prices up from today. The Star, [Online] 3 June. Available from<http://thestar.com.my/news/story.asp?file=/2013/6/3/nation/13191030&sec=nation> [Accessed on 7 June 2013]

Zhang TingTing, 2013. World Figures and Their Smoking Stories. [Online] Available from: http://www.china.org.cn/world/2013-06/03/content_29008502.htm [Accessed on 7 June 2013]