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Tobacco Industry: Demand And Supply

The following article helps us know very well what demand and offer concept and that people are describing with the exemplory case of cigarette industry. And we have also mentioned the factors impacting on the demand and offer for cigarettes in the market. The essay also includes the income impact, impact of close substitutes and compliments, and also the price and income elasticity of the product of the industry. A cigarette is a product used through smoking and created out of healed and finely slice tobacco leaves and reconstituted tobacco, often coupled with other chemicals, [1] then rolled or stuffed into a paper-wrapped cylinder (generally add up to 100 mm long and 10 mm in diameter). Rates of cigarette vary generally. While rates of smoking have leveled off or declined in the developed countries, they continue steadily to rise in producing nations.

Cigarettes will be the most frequent source of fires in private homes and europe inclined to ban smoking that aren't fire-safe by 2011.

Fixing the price of something is an essential factor for an organisation and the merchandise success. Organizations look at the effective demand (demand) and effective supply (resource) of something to set the best price to create the maximum income for the organisation. If the price of the product boosts or decrease then it can affect the demand of the merchandise. "As the price of a good rises less will be demanded, in case the price falls more will be demanded" (Philp & Galt, 2009, Lecture Records, p: 2). The increase or decrease in price can occur due to the either external or internal or both surroundings of the organisation.

The major companies that will be the major share holders of the united kingdom market are

1. Gallaher Group Ltd with the 37. 90% of the marketplace share.

2. Imperial Tobacco Ltd with the 35. 40% of the market share.

3. Rothmans Ltd with the 18. 20% of the marketplace share.

The other have the marketplace talk about of 3. 80% and the private label are of 4. 70% supports the market show respectively.

(Data monitors, 2005)

Demand of a product or service can be defined as the quantity of a particular economic good or service a consumer or band of consumers will need to purchase at confirmed price over a specific period of time. The demand is usually downward sloping, since consumers will want to buy more as the price decreases. Demand for a good or service is determined by different factors apart from price, including the price of alternative goods and complementary goods. In extreme cases, demand may be completely unrelated to price, or practically infinite at confirmed price (regarding the tobacco industry) (Beardshaw, 1991).

According to Philp, Dan and Galt (2009) maybe it's deduced that demand relative to the tobacco industry is the effect of a quantity of aspects where the key drivers is the price of the cigarettes. As a result, for a cigarette (t) the number demanded (QtD) signifies a function of its price (pt), specific customer (n) income levels (Y1 Yn), other types of substitutes like electronic cigarettes and natural and organic tobacco (r1rt-1) and other exterior factors (E) such as labour, organic materials. Then, demand within the cigarette industry can be represented as

QtD = f (pt, Y1 Yn, r1rt-1, E)

Being consistent with this, important demand in economics (tobacco industry) would be hard to figure the number demanded due to the quantity of determinants required to make-up the cigarette packets price and variety, therefore, it is assumed that factors are held constant and the marketplace (quantity demanded) is analysed as a function of packet price. So the quantity demanded

QtD = f (pt, Y1 Yn, r1rt-1, E)

Graphically illustrated will be

Following the above figure, managers would be able to depict that the higher the price tag on the cigarette packets in the industry, the lower the demand for this. Consequently prices will have to move from p0 to p1 in order to increase demand from q0 to q1.

Consider two acute cases. Suppose the price tag on all cigarettes goes up by 1 %. The number of cigarettes demanded will not affect very much. People who can readily quit smoking have already done so. In contrast, suppose the price of a particular make of cigarettes goes up by 1 per cent, all the brand prices left over unchanged. We expect a much bigger volume response. Consumers swap from the dearer brand to other brands that also satisfy the nicotine habit. For a specific cigarette brand the demand elasticity is quite high.

From the above figure it could be mentioned that the same $1 duty has a much bigger impact on variety when demand is more stretchy than when it's inelastic. Elasticity is the responsiveness of 1 adjustable (e. g. demand) to a change in another (e. g. price). This idea is fundamental to understanding how market works. The greater flexible variable is, a lot more responsive the market to changing circumstances (Sloman, 2005).

The rules of demand expresses that a street to redemption in the price tag on a good boosts the quantity demanded. The price elasticity of demand steps how much the number demanded responds to a change in cost.

(Mankiw, 1998)

Cigarette consumption is very found to be negatively related to price. As considerably the consequence of the test, studies and the tests done before, there direct result says that increase in price on smoking are not much affected on the demand of computer. Many economists viewed that using tobacco is illogical and therefore not ideal for usual economic examination. They think that demand for cigarette smoking does not follow the essential rules of economics like the downward-sloping demand curve.

Findings how demand for cigarettes changes as consumers' income boosts is inconsistent. From a number of studies it found that income has either negative effect or insignificant effect on the demand of cigarette smoking. As far as the government and other health matter trust want to stop smoking in public areas place and in the private work sites since it is very damaging for other who's non smoker which is not environmental friendly (Bradford, 2003, Vol 9).

Government whatsoever levels are implementing the insurance policies to limit smoking. Government also banned so it the customer should be above a legal age to buy the smoking cigarettes. World health company survey of smoking control procedures in lot of countries mentioned that the usually all the countries have followed insurance policies to limit smoking in public areas. Although the restrictions are primarily intended to reduce non-smokers, they can also impact the smokers since the restrictions decrease the smoker's opportunities to smoking or otherwise improve the "cost" of smoking (Reuijl & Leeflang, 1985, Vol 49). Cigarettes was the main one of the most publicized and promoted product on earth. But due for some controversial issues many countries limit it. While some other countries have few restrictions, others ban advertising and advertising completely.

Due to the limitation on the advertising and the advertising the demand of the cigarette industry was affected. A lot of new opportunities of the new organization to enter in are hard. Plus the clients or consumers are decreased. And because of this you can find less increase in the quantity of the young era.

Cigarettes are been long been taxed by the government and because of this there is go up in the price in some countries. Taxes are differing from country to country and the price also. The inelastic demand off the product makes good revenue for the federal government. But in recent taxation has been applied to cigarettes are in order to health. Cigarette fees in a few countries like the USA have been enforced by various levels of government, national, status and local level. Government authorities in almost every country impose fees on tobacco and other cigarette products.

One of the major factors that have an effect on the demand for any product is because of the substitutes. The more substitutes, the more elastic the demand will be. For instance, if the price of petrol travelled up by 0. 25, consumers could replace open public transport. This means that petrol is an elastic good just because a raise in cost will cause a huge reduction in demand as consumers start exploring by the general public move more from private transport. The surge of the petrol price can affect the auto industry. This factor is also called the "invisible hands" (Adam Smith Cited in Mishan, 1993, p 91) which is affected from the deviation of the other product or substitutes which impacts the primary product demand on the market. For the tobacco industry the invisible hands factor isn't that much affected but the competition on the market within the industry is high.

If the price of alcohol rises all together, there will be probably just a little change in the consumption of beverage and other products because there are just few substitutes for alcoholic beverages. Most people are not willing to give up their enjoyment at any cost and even the liquor is used in a number of drugs also so no matter what the purchase price is the intake of alcohol will be not damaged by the substitutes. Therefore, we'd say, that alcoholic beverages can be an inelastic product because of its lack of substitutes. So we can say that a product is stretchy in the industry but the complete industry is commonly inelastic.

This is the second factor that effects the demand elasticity and it relates the quantity of somebody who can be spend on a specific product or good. Like, if the price of a chocolate goes up from 1 to 2 and income of the client remains the same, the total amount that is available to spend on chocolate is good for e. g. 4, is now enough for only 2 alternatively than 4 chocolates. In other words, the client is forced to lessen the demand of delicious chocolate. Thus if there is an increase in cost no change in the quantity of income available to spend on the merchandise then there will be an elastic reaction in demand. But in cigarette industry it is not that much influenced as a result of addiction of the buyer.

Time is the 3rd factor which influences the demand elasticity. If the price tag on packet of cigarette goes up 1, a cigarette smoker with an extremely few available substitutes will continue buying the daily cigarettes. It means that smoking have inelastic demand because the changes in cost won't have a great influence on the number demanded. But if the customer or consumer discovers they are unable or cannot manage to spend the increased amount then they will definitely make an effort to quit it however in a long run. Then for this customer price elasticity of smokes becomes elastic in the long run.

If variety demanded is completely unaffected by a cost change, then

"If the overall value of the elasticity of demand is less than 1 at some point, we say that demand is inelastic at that point" (Varian, 2006, P 282). You would say that demand is perfectly inelastic at that price, to reflect the actual fact that volume demanded is completely unresponsive to an alteration in price. Over a graph with price on the y-axis, perfectly inelastic demand looks as a vertical demand curve. Its slope is negative infinity, which leads to Ed = 0.

Looking at the graph above, we can see a 5 percent increase in price triggers no change in number demanded. Therefore, Ed = 0 and demand is perfectly inelastic for the tobacco industry. Hence, supervisor of any cigarette company within the industry should not stress about the taxation from the government or upsurge in price because of the external environment because of the inelastic demand for the tobacco industry.

(Source by Begg & Ward, 2007)

The variation in consumer demand for smokes with respect to income is ambiguous from a theoretical stand point. Smokes consumption could be a normal best for which the level of consumers demand enhances with income. Alternatively, it might also be a lower good for which the consumer demand drops with income levels. In either case, the occurrence of such behavior offers us no direction whatsoever with respect to the extent to which these decisions are logical.

Similarly the other major factor which is often affected by the price tag on the tobacco is supply. Source for something or something can be defined as the number of a good, retailer wishes to sell at each possible price. Way to obtain a good identifies various quantities of good which a seller is ready and able to sell at different prices in confirmed market, at a particular point of your energy, other things left over the same. An aspect of source which needs attention is supplying relates to scarcity. It is only the scarce good which has a supply price. On the contrary, goods which can be found freely have no source price, e. g. Air is offered freely and hence, does not have a supply price (Begg et al, 2005).

According to Philp, Dan and Galt (2009) resource relative to the cigarette industry is reflective of the amount of competitors (m) establishing the price tag on providing tobacco packets as a function of the amount of technology (T) decides the price (pt), cost of resources, for example, labour, taxations, substitutes, and quality within the make process (F1, F2 Fm) and other demand (w) i. e. cost of machines and wages of employees, all soon add up to become determinants of the amount of cigarette smoking packets to be supplied at each given price. It is represented as

QtS = T (pt, F1, F2 Fm, w)

Identical to economics popular, in the evaluation of supply all factors are kept constant and quantity sometimes appears as a function of price;

QtS = T (pt, F1, F2 Fm, w)

Graphically illustrated as;

From the above figure professionals can know that a investing in developing the product requires a certain level of supply to conquer from they break even point, therefore higher the investment in cost a lot more the resource. Hence cigarette creation companies offer different brands for the tastes e. g. long smoking, strong and light smoking cigarettes. Consequently, the professionals will thrust for a higher supply in p1 to maximize profit.

If there is enough of free capacity of Smokes then a business should be able to increase its outcome without a go up in costs and for that reason source will be flexible in response to a big change in demand.

If companies of recycleables and completed products are at a high level then a firm is able to respond to an alteration in demand quickly by delivering these stocks and options onto the market - source will be elastic. Conversely when companies are low, dwindling equipment drive prices higher and unless stocks can be replenished, source will be inelastic in response to a big change in demand.

If both capital and labour resources are occupationally mobile then your elasticity of supply for a product is greater than if capital and labour cannot easily and quickly be switched.

Supply Elasticity is a measure of the amount of responsiveness of amount offered to changes in the product's own price. Elasticity of supply works similarly. When a change in cost results in a major change in the total amount supplied, the supply curve shows up flatter and is considered elastic. Elasticity in cases like this would be higher than or add up to one (Lipsey & Chrystal, 2004)

On the other hand, if a major change in cost only leads to a change in the quantity supplied, the source curve is steeper and its own elasticity would be significantly less than one.

As we've seen that demand of cigarette is inelastic we can monitor from the graph supplying of cigarette is also inelastic i. e. even a major change in price does not have major change in volume supplied. It means that when a cost increases consumers will not demand for more volume that's why resource will also stay the same.

After understanding that the demand and supply for the tobacco industry is inelastic however the competition within the industry is high. The bigger price than the competitors can direct result less demand for the product, the low price can increase the demand for the merchandise. It influences managerial decision to look for the new marketplaces where they can reduce their functional and manufacturing cost like cheap labour, as well as look for the new market so the organisation can make maximum revenue.

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This article completely shows us that how the demand and offer take effects into the market and exactly how principles of demand and supply inform the managerial decision making. Out of this article we come to know that the cigarette industry is not that much damaged from the bigger price much and its demand on the market is almost stay same. Out of this essay we come to know that both resource elasticity and demand elasticity for cigarette industry are inelastic, they aren't affected by the price. From the essay we come to learn that income impact is significant and positive in case there is cigarette industry.

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