What do Price Elasticity of Cigarette Demand and the Correlation between Cigarette Consumption and Education Attainment Tell Us?

Higher prices increase costs to consumers and discourage cigarette consumption. As the price of an item increases by a certain percentage, consumption of the item falls. The percentage decline in consumption caused by a percentage increase in price is measured by price elasticity of demand. Price elasticity of demand can help show that some of the decline in cigarette consumption can be explained by higher prices, but most of the decline is attributed to expanding health concerns.

Despite the simplicity of the method used to calculate elasticity of demand in this study (the percentage change in consumption to change in real price), our results closely replicate other empirical studies using different techniques. Our calculations for price elasticity of demand for cigarettes between the years 1971 to 2001 are shown in below.

The price elasticity is -0.26 for the period 1971-81, which indicates that a 10% increase in cigarette price brings a 2.6% decrease in cigarette consumption. The role of cigarette price in determining cigarette consumption increased materially in the 1980s, with a 5.8% reduction in consumption associated with a 10% increase in price. However, over the last three decades, cigarette consumption has remained price inelastic, which means a change in price has a relatively modest downward impact on consumption. Smoking has a major role in contributing to the change in consumers' desire for cigarettes.

Source: http://www.choicesmagazine.org/2004-1/2004-1-09.htm

Written by: Yap Kien Wai 0309031