Section II: Factors affecting demand


by Ryan Pensack

            The market for cigarettes is highly profitable. The consumers who buy the product usually readily come back for more, as they would for food products or beverages. As Mark Twain once commented: “Quitting smoking is easy. I’ve done it a thousand times.” Even though the demand for cigarettes had been rising up until the 70’s in the United States, recently demand has been declining.



Source: U.S. Department of Health and Human Services
Found online at UMASS Boston General Biology
as well as in the book Cigarettes: Anatomy of an Industry from Seed to Smoke





            There are several different influences on a consumers’ buying plan that can change the demand for a good. These include the prices of related goods, income of the buyers, buyers’ expectations, the number of buyers, and buyers’ preferences. Also, the quantity demanded of a good can change according to the law of demand, which states:

“Other things remaining the same, if the price of a good rises, the quantity demanded
of that good decreases; and if the price of a good falls, the quantity demanded of
that good increases (Bade 85).”



Substitutes

            Substitutes are one type of good related to cigarettes which might affect the demand for cigarettes. You might think that it is easy to identify a substitute for cigarettes. Take tobacco chew and cigars, for example. These products differ for several reasons, however. The first, and perhaps most important, is that these other forms of using tobacco are not as socially acceptable as cigarettes. Take for instance tobacco chew. The places where people work, or where people dine, do not regularly have a spittoon where one can spit there juice into. Also, take cigars for example. In today’s fast-paced world, people do not have the time to smoke cigars. Cigars also produce much more air pollution than do cigarettes, so people will be less inclined to smoke them around other people. The second reason these other forms of using tobacco are not good substitutes for cigarettes is because they differ in their nicotine content. Tara Parker-Pope states in her book Cigarettes: Anatomy of an Industry from Seed to Smoke that “in the 500 years of recorded tobacco history, cigarettes [have] proved the most effective delivery device for nicotine (p. 28).” This keeps buyers coming back for more of this product.

Recently, nicotine supplements have been created by companies such as Nicorette. They fit both of the previous criteria. They are both socially acceptable, and they have a suitable and quick nicotine content:


Source: Nicorette


Also, according to the 2nd edition of Foundations of Microeconomics by Robin Bade and Michael Parkin, "this change in preferences has decreased the demand for cigarettes and increased the demand for nicotine patches."

Therefore, nicotine patches and gum are substitutes!


Complements

            Complements are another type of good related to cigarettes that might affect the demand for cigarettes. However, again, there does not appear to be a suitable complement to cigarettes. One could argue that beer is a complement to cigarettes, as for some people, the tendency, or the urge, to smoke increases with beer consumption, but this is not really a complement as much as it is a preference. For example, a change in the price of beer would not bring about a change in the demand for cigarettes of a buyer. The buyer most likely would consume the same amount as routinely necessary.


Income

            The effect of the income of buyers on the demand for cigarettes is rather interesting. Cigarettes cannot be categorized as either a normal good or an inferior good. Howard Choe, a beverage and tobacco analyst, states that the demand for cigarettes "tends to remain steady through recession or prosperity." However, he goes on to say that "the quality of the cigarettes bought (premium vs. discount) is related directly to a buyer’s income." Therefore, a fall in the buyers’ income will result in a switch from a premium brand to a discount brand and not a change in the demand for cigarettes.


Expectations

            Buyers’ expectations also have an interesting affect on the demand for cigarettes. According to the effect of income on buyers, income has no effect on the demand for cigarettes. Therefore, an expected rise in future income would have no effect on the demand for cigarettes. However, an expected change in the price of cigarettes would affect the demand. For example, if a buyer were to expect a future rise in the price, instead of buying their regular amount, a carton (10 packs), to suit their needs for the next couple of days, they might purchase two or three cartons to achieve a discount in comparison to the price they would pay in the future. This increases the demand for cigarettes for that buyer on that purchase.


Number of buyers

            The number of buyers also affects the demand for cigarettes. The population growth in the United States, a developed country, is relatively slow, so all other things remaining the same, the demand will stay the same through time. The recent campaign to constrict the sale of cigarettes to those of legal age, however, has no doubt reduced the number of buyers and thus decreased demand. Over the next decade, the “21-to-27-year-old age group is expected to show strong growth (Choe 20)” which is an increase in the number of individuals reaching the legal age to buy tobacco products. This should cause an increase in the demand for cigarettes, perhaps balancing out the decrease caused by the strict campaign against underage sales.


Finally, it is also worthy to note that some U.S. cigarette companies have chosen to take their business to an international level. This is most likely due in part to the quickly growing populations in developing countries that causes an increase in the number of buyers and an increase in the demand for products (such as cigarettes). Other factors, such as decreased regulation of cigarette sales, would likely play a role as well.


Buyers' preferences

            Consumer attitudes, or buyers’ preferences, have perhaps been the biggest contributor to the decrease in demand for cigarettes in the recent years. The main reason for this change in preferences has been the public’s increased awareness to the health hazards associated with cigarettes. Cigarette companies tried to battle early warnings that cigarette use was hazardous by producing filtered cigarettes, which were more “safe” (Parker-Pope 126). However, it was not long bofore the public was able to see that the cigarette companies were trying to blot and distort the truth behind cigarettes (www.thetruth.com). This is perhaps why the demand for cigarettes did not begin to steadily decrease until the 70’s (several years after the 1964 Surgeon General's warning). (See Above)


Conclusion


Source: U.S. Department of Health and Human Services

The demand for cigarettes forms a peak between the 60’s and 70’s, but decreases afterwards. The main contributor to the recent decline in the demand for cigarettes was probably the change in the buyers’ preferences, an increased awareness of the health risks involved with smoking.

Also, it is worthy to note that until recently, cigarettes have had a relatively low tax applied to their cost. Many states, however, have begun to increase taxes dramatically in perhaps an attempt to reduce demand for cigarettes. However, according to Howard Choe, the rise in price will not cause the quantity demanded to decrease, it will just result in a decrease in the quality demanded. But the tax hikes taken by many states really are incredible, with the tax on a pack of cigarettes reaching as high as $3 in New York City. Thus, cigarettes might actually be unaffordable to some and the quantity demanded would decrease. In effect, the government is placing as many chips as they can on the table until the most prevalent smokers, the lower and middle classes, have to fold their cards on the cigarette table. A black market has risen, though, that feeds the demand of those who can’t afford the high price of cigarettes (See Cigarette Taxes, Black Markets, and Crime Lessons from New York’s 50-Year Losing Battle). People buy mass quantities in southern states, where cigarette taxes are extremely low, and sell them without paying the state tax in the city for a cheaper price.







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