Study of Uk Cigarette Industry

AN ECONOMICS ANALYSIS OF THE CIGARETTES MARKET IN THE UNITED KINGDOM. | November 28

2011

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| ECONOMICS ASSIGNMENT NO.1

Word Count: 1,999 |

CONTENTS

INTRODUCTION 3

ANALYSIS 3

1. Tax consideration 3

2. Advertisement 4

3. Knowledge on health issues 5

Demand 5

PED, PEI, PEX 6

Substitutes and Complementary goods 7

Supply 10

CONCLUSION 13

BIBLIOGRAPHY 14

LITERATURE AND THEORY 14

INTRODUCTION

The demand for cigarettes is said to be addictive due to the Nicotine found in the smokes of the commodity. This addictive effect will be studied in relation to demand analysis as well as the United Kingdom’s (UK’s) government measures to discourage the consumption of this demerit good. Also, the industries current position with the possibility of new entrants will be given focus as well as current market conditions.

ANALYSIS

Various factors determine the demand and supply curves of the studied commodity. Given the special characteristics of this commodity; addictiveness is a highly influential factor to consider. However, it is firstly essential to note that the consumption of cigarettes has been decreasing in the UK.

(FIG.1) Figures only from (TMA)

There are a number of reasons that could explain the falling consumption trend.

1. Tax consideration

(TMA), “The total tax burden (excise duty plus VAT) accounts for 90% of the price of the cheapest cigarettes on sale in the UK.” Government consideration is obvious with regards to the demerit good, however it can be shown that the tax burden falls on the consumers and not the producers (below). Could the UK government actually benefit from those people consuming cigarettes more than spending on them in National Health Service? According to the (TMA), “Tax revenue from tobacco in 2010/11 amounted to an estimated £11.1 billion – £9.1 billion in excise duty plus £2 billion in VAT.”

S+Tax

S+Tax

Tax

Tax

Price of Cigarettes

Price of Cigarettes

S

S

Consumer

Consumer...