question archive Recent research confirms that the demand for cigarettes is not only price inelastic, but it also indicates smokers with incomes in the lower half of all incomes respond to a given price increase by reducing their purchases by amounts that are more than four times as large as the purchase reductions made by smokers in the upper half of all incomes
Recent research confirms that the demand for cigarettes is not only price inelastic, but it also indicates smokers with incomes in the lower half of all incomes respond to a given price increase by reducing their purchases by amounts that are more than four times as large as the purchase reductions made by smokers in the upper half of all incomes
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Recent research confirms that the demand for cigarettes is not only price inelastic, but it also indicates smokers with incomes in the lower half of all incomes respond to a given price increase by reducing their purchases by amounts that are more than four times as large as the purchase reductions made by smokers in the upper half of all incomes. How can the income and substitution effects of a price change help explain this? Price elasticity describes the sensitivity between quantity demanded/supplied and price when a change in price occurs. A relatively lower change in quantity versus a change in price means the product is more price inelastic; a higher relative change in quantity versus a price change indicates more price elastic. What are the the substitution effect and income effect dynamics?
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Answer:
If a person's income remains the same but prices rise, the result may be that his purchasing power decreases. This is because with the same amount of money, you are now able to purchase a smaller amount of good or the service offered.
For example, if my income was set aside for how I would spend $ 200 a month on cigarettes that cost $ 20 a pack, then I would be able to buy a total of 20 packets. However, if the price of cigarettes goes up to $ 40, I will have to save more, or I can now buy only 10 packets with the given amount I have.
This means income generation. It means a reduction in demand due to a decrease in real income for a person. In addition, I would be tempted to substitute for my desired tobacco by purchasing other tobacco products so that even if my use did not change, my budget would not be affected.
However, the demand for cigarettes is very small which means that the price change does not reflect much in demand as people find it difficult to replace tobacco or stop the same demand, but after a while, people want to replace.
Also, for wealthy people with high incomes, the replacement effect does not work because they may be able to increase their budget with inflation. However, for those living on the fringes, they can still afford the product which can be very difficult considering that they find it difficult to raise their budgets. They will have to give up their demand or settle for less expensive alternatives such as chewing tobacco products.
