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HSH717 Health Economics For Primary Theoretical And Conceptual Framework

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Questions:

1. What does the evidence tell us about the price elasticity of demand for cigarettes over time and is the price elasticity of demand the same for all population groups? 2. Provide an example of a policy that will impact on the price of cigarettes and the evidence of the effectiveness of this type of policy in reducing demand.
 

Answer:

Introduction

Of the primary theoretical and conceptual framework of economics, the most eminent ones are the concepts of demand and supply and also the notion of price elasticity of demand. In economics the concept of marker refers to the open platform where the buyer and the sellers of different products or services interact with one another to decide on the price and quantity of the concerned product or service. While the buyers represent the demand forces, the sellers are the supply side players in a market and the interaction and dynamics of these two forces determine the equilibrium in the market. However, the demand and supply of different products also vary depending upon the differences in the price elasticity of demand of the products (Nicholson & Snyder, 2014).

In this context, it can be mentioned that for necessary commodities as well as for commodities of addiction, the demand does not vary much due to the changes in the price as people tent to keep their consumption more or less same, even by compromising on other aspects. Tobacco and related commodities like cigarettes also fall in this category, which thereby, usually have a non-elastic type of demand and low-price elasticity in a general framework. However, these trends may vary from place to place and between different types of individuals.

Keeping into consideration these conceptual frameworks of economics, the concerned essay tries discuss the economic concepts behind the demand and price elasticity of demand for cigarettes, the changes in the demand for the same with time and also the dynamics in the price elasticity of demand for cigarettes among the different populations, thereby highlighting the policies present in this aspect and their weaknesses and strength, in the Australian market framework.

 

Market for Cigarettes

Cigarettes and other tobacco products have experienced considerable increase in the demand over the last few decades, barring the last few years, after 2013, which can be seen from the following figure, which shows the increase in the consumption of cigarettes alone in the global framework:

As is evident from the above figure, with time the global consumption of cigarettes has increased considerably with strikingly high rates of increase in the last decade. The level has been however seen to decrease to some extent from 2014, although the numbers of cigarettes consumed globally still remains high (Tollison & Wagner, 2012).

However, in the countries like that of Australia, the number of cigarettes and tobacco products consumed as a whole is seen to be decreasing to some extent, as is evident from the following figure:

This anomaly maybe because of the imposition of the high taxes imposed on this kind of products by the government of Australia (Globaldata.com, 2018). This can be seen with the help of the following figure, showing the value of excise and custom duty and its change over the years:

The price of tobacco and cigarettes in Australia has increased gradually over the years, with not much striking increase in each year but quite a visible increase if considered over a period of time, which can be seen from the following table:

Table 1: Increase in the price of packs of cigarettes in Australia over the years

Year

Price of per pack of cigarettes (2017 dollars)

2001

15.93

2002

16.07

2003

16.25

2004

16.16

2005

17.48

2006

17.90

2007

17.58

2008

17.59

2009

18.46

2010

19.72

(Source: Joe et al., 2018)

As is evident from the above table, barring the year 2004, the price of per packet of cigarettes in Australia has consistently increased over the last decade. This can be attributed to the increase in the taxes imposed by the government of the country in order to decrease the consumption of tobacco related products in the country given the negative impacts of consumption of such products on the health of the population of the same.

As is evident from the above figure, there exists a visible inverse relationship between the price of the tobacco products and their demand in Australia, the demand for the same can be seen to be decreasing with the increase in price of the same, owing to the tax imposed on the concerned products in the country over the years (Chaloupka, Yurekli & Fong, 2012).

From the above figure it is clearly evident that over the last few decades, with the increase in the price of the cigarette in the USA, the consumption of the same has steadily declined.
 

Economic Interpretation

The above phenomenon of the decrease in the consumption of tobacco products in Australia as well as in other parts of the world, especially the developed countries like that of the USA and also Great Britain, attributed to the increase in the level of tax, thereby increasing the price of the same can be explained with the help of the theory of demand and supply. In the conceptual framework of economics, the demand for normal commodities or services are inversely related to the dynamics in the price of the same. That is, if the price of the normal commodities increases then the demand for the same decreased and vice versa, which in turn indicates towards the fact that the demand curve is negatively sloped, which can be shown as follows:

From the above figure, it can be seen that with the decrease in the price from P1 to P2, the demand for the normal commodities increase from Q1 to Q2 and vice versa, which gives the demand curve a negative slope. However, the magnitude of change in demand of goods and services in response to the change in the price of the same is not same and varies according to the nature of the goods or services as well as according to the taste and preference and the income levels of the consumers (Pindyck & Rubinfeld, 2014).

As is evident from the above table, over the time period of 2001-2010, there has been a reduction in the consumption of cigarettes among all the age group of the population of the country, which can be due to the increase in the level of price of the commodities as well as the rising consciousness among the population of the country regarding the negative implications of the consumption of tobacco related products. However, the extent of consumption as well as the magnitude of decrease in the consumption of the same is not seen to be uniform across all the age groups of the country. More specifically, the consumption of cigarettes can be seen to be specifically high among population over 30 and above than below it. The magnitude of decrease in the per day consumption of cigarettes is also seen to be different among the different population groups of the country. This maybe because of the life and work stress variations among different age of the population. The people, who in general have a stressful life tend to rely on smoking as a stressbuster and cannot let go off the same very easily, compared to others who do not tend to view cigarettes and reliefs to their work tensions.

The tobacco consumption pattern of the population and the magnitude of decrease of the same with the increase in the price of the same is also seen to be varying with the different income levels of the populations.


Income quintile

Percentage Spending on tobacco (2003-2004)

Percentage Spending on tobacco (2009-2010)

Percentage decrease in Spending

Lowest

1.8

1.4

0.4

Second

1.9

1.5

0.4

Third

1.5

1.3

0.2

Fourth

1.2

1.1

0.1

Highest

0.8

0.5

0.3

(Source: Joe et al., 2018)

As is evident from the above table, there exists differences in the magnitude of decrease in the level of consumption of tobacco products in the country according to the income level of the population of the country too (Rosenberg et al., 2012).

These differences in the demand patterns and the changes in the same with the increase in the price of cigarettes and other tobacco products in Australia can be explained with the help of the concept of elasticity of demand which is one of the most widely used concept in the economic theoretical framework.

Price elasticity of demand: Concept and Application

In the conceptual framework of economics, there exist the theory of price elasticity of demand as has been discussed in the above sections of the essay. The own price elasticity of demand of a commodity, thus, shows the change in the quantity demand of the product due to one-unit change in the price of the same (Rios, McConnell & Brue, 2013).

The elasticity of demand for products, vary according to the nature of the commodities as well as according to the demand and preference patterns of different people and also with their income levels. If with one unit increase in the price of the product or service the demand for the same decreases more than proportionately and vice versa then the demand for the same is known to be highly elastic (Hall & Lieberman, 2012). On the other hand, if with one unit increase in the price of the product, the demand for the same decreases less than proportionately, then the demand for the same is considered to be inelastic, which can be shown with the help of the following figure:

As is evident from the above figure, with the same increase in the price levels, the extent of decrease in the demand for the commodity for those with inelastic demand for the same is much lesser then the decrease in the demand for the commodity for those with elastic demand.

This explains the differences which can be seen to be occurring in the extent of decrease in the consumption of tobacco products among the different age groups as well as income groups of the population of the country over the years and with the increase in the price of the same. As can be seen from the consumption patterns of the different income groups of the country, the lowest two income quintiles are more sensitive to the price rise of tobacco, as compared to the middle two quintiles, which in turn indicates that the elasticity of demand for tobacco products are comparatively higher in the lower two quintiles as compared to the other income groups of the country (Rader, 2014).

On the other hand, the age wise elasticity of demand for tobacco products in the population of Australia can be seen from the following table:

Table 3: Age-wise elasticity of demand for tobacco products in Australia

Age Group

Elasticity of demand

18-24

0.44

25-29

0.77

30-39

0.66

40-59

0.34

60 and above

0.02

(Source: Joe et al., 2018)

From the above table it can be clearly seen that there exit significant differences in the elasticity of demand for tobacco products according to different age groups, with the 60+ age group having highly inelastic demand and 25-29 age group having considerably higher elasticity than other (Bidwell et al., 2012). However, the overall demand for tobacco products appears to be comparatively less elastic to prices in the country, which explains the increase in the revenue generated from tax imposition on tobacco products.

 

Current policies: Strengths and Weaknesses

The government of Australia has considered the issue of tobacco and cigarette consumption as that of a primary health hazed and has been working for years on the issue with the objective of decreasing the consumption of the same. The primary policy which the government can be seen to be usually taking is that of increasing the level of tax imposed on various kinds of tobacco, both the at the stage of imports, thereby making it costly for the cigarette manufacturers and also at the stage when the packet of cigarette is bought by the consumers. This dual step price hike can be seen to be increasing the monetary cost of smoking, the effects of which can be seen on the minors and students (school and college going ones):

The affordability issue can be seen to be hampering the cigarette consumption of the young sector of the population. However, this step though somewhat effective cannot be relied onto as the single effective one for all the age group of the population, especially for the working class who tend to have a low-price elasticity of demand for the same. The government has initiated awareness generation programmes in the recent period to decrease the overall willingness of smoking by highlighting the health hazard, which can be seen to be making a section of the population sceptic to smoking. However, there remains considerable number of smokers till date in the country and the government need to take more efficient strategies and policies in order to combat the issue in consideration.

 

Conclusion

From the above discussion, it can be concluded that tobacco being a hazardous product of consumption, has been increasingly consumed across the world as well as in Australia in specific. The government of different countries, including Australia have over the years imposed different taxes on the product to decrease the consumption of the same. However, the demand for tobacco products being less elastic, the effects of such price increasing impositions have only been partial and age and income subjective. Thus, for a more efficient method of reducing the demand for the same, quantity restrictions and imposition of quota and stricter licensing on the same appear to be a more efficient strategic and policy framework.

 

References

Archive2.mrc.org. (2018). New York Times Touts ‘Plain Packaging,’ Downplays Impact of Taxes on Tobacco. Media Research Center. Retrieved 25 April 2018, from https://archive2.mrc.org/bias-numbers/new-york-times-touts-plain-packaging-downplays-impact-taxes-tobacco

Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.

Bidwell, L. C., MacKillop, J., Murphy, J. G., Tidey, J. W., & Colby, S. M. (2012). Latent factor structure of a behavioral economic cigarette demand curve in adolescent smokers. Addictive behaviors, 37(11), 1257-1263.

Chaloupka, F. J., Yurekli, A., & Fong, G. T. (2012). Tobacco taxes as a tobacco control strategy. Tobacco control, 21(2), 172-180.

Economist.com. (2018). Time to quit. The Economist. Retrieved 25 April 2018, from https://www.economist.com/news/international/21657383-even-though-it-clear-how-get-people-stop-smoking-rates-are-still-rising-many

Fugazza, M. (2013). The economics behind non-tariff measures: theoretical insights and empirical evidence. UN.

Globaldata.com. (2018). Australian smoking tobacco market to grow in short term despite tax hikes | GlobalData Plc. GlobalData Plc. Retrieved 25 April 2018, from https://www.globaldata.com/australian-smoking-tobacco-market-grow-short-term-despite-tax-hikes/

Hall, R. E., & Lieberman, M. (2012). Microeconomics: Principles and applications. Cengage Learning.

Joe, C., Wei, C., Li, M., & Dai, Q. (2018). The elasticity of tobacco demand in Australia - PDF. Docplayer.net. Retrieved 25 April 2018, from https://docplayer.net/22225737-The-elasticity-of-tobacco-demand-in-australia.html

Nicholson, W., & Snyder, C. M. (2014). Intermediate microeconomics and its application. Cengage Learning.

Pindyck, R. S., & Rubinfeld, D. L. (2014). Microeconomics.

Rader, T. (2014). Theory of microeconomics. Academic Press.

Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, problems, and policies. McGraw-Hill.

Rosenberg, M., Pettigrew, S., Wood, L., Ferguson, R., & Houghton, S. (2012). Public support for tobacco control policy extensions in Western Australia: a cross-sectional study. BMJ open, 2(2), e000784.

Statista.com. (2018). Global consumption of cigarettes 1880-2016 | Statistic. Statista. Retrieved 25 April 2018, from https://www.statista.com/statistics/279577/global-consumption-of-cigarettes-since-1880/

Tobaccoinaustralia.org.au. (2018). 13.2 Tobacco taxes in Australia - Tobacco In Australia. Retrieved from https://www.tobaccoinaustralia.org.au/13-2-tobacco-taxes-in-australia

Tobaccoinaustralia.org.au. (2018). 13.5 Impact of price increases on tobacco consumption in Australia - Tobacco In Australia. Tobaccoinaustralia.org.au. Retrieved 25 April 2018, from https://www.tobaccoinaustralia.org.au/13-5-impact-of-price-increases-on-tobacco-consumpt

Tollison, R. D., & Wagner, R. E. (2012). The economics of smoking. Springer Science & Business Media.

Uncdiss.wordpress.com. (2018). public health | Uncommon Dissent. Retrieved from https://uncdiss.wordpress.com/category/public-health/

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