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Economics Assignment




Question;Section 1Headlines of people and companies suing tobacco makers are nearly an everyday occurrence.More and more smoking is becoming less cool as the dangers of the drug are becomingclearer. Yet despite the costs of this habit, nearly 25% of adults still smoke, helping fuel one ofthe largest industries in America. The following graph illustrates the decline of people whosmoke throughout the years CDC graphHistory:Cigarettes and tobacco has a quite unique history. Over 6000 years ago tobacco becamepopular due to the beliefs that it could cure almost anything. This idea was popular until the1500s and is the cause of tobacco spreading throughout the world. This worldwide popularityserved the early United States well due to the large crops of tobacco in the colonies and wasused for a large part of the funding for the Revolutionary war. Not long after the product wasfound to be dangerous and addictive. Scientists found that nicotine was a poison as early as1826. However the demand for cigarettes grew and grew, finding a height in the two WorldWars. Cigarettes were freely distributed to soldiers overseas (sometimes even part of the foodration), which led to the popularity and sales of tobacco products during the wars. Soldiers wouldcome back and be healthy customers for the large tobacco companies. During the 1950s moreand more evidence was found that smoking caused lung cancer and soon after in 1964 the firstsurgeon generals warning on cigarette packages was seen. As more people realize the dangerof the product, smoking is gradually fading from popularity and major lawsuits are taking placetohold the tobacco companies responsible for their products. The tobacco timelineCompany Makeup:Tobacco companies today are very powerful and few in number. Phillip Morris and RJ Reynoldscontrol over 75% of the United States cigarette market (Phillip Morris website). These twocompanies basically form an oligopoly. They offer very similar products and between the twothey control most of the market share. However, these companies for the most part have notformed a cartel because there is a lot of competition between them. They spent billions eachyear on advertising, lowering profits for both. This behavior is contrary to that of a good cartel.Also, these two companies have diversified over the years in an attempt to avoid some of theattacks on the cigarette market. Phillip Morris also runs Miller Brewing and Kraft foods. RJReynolds also has business on kitchen products (Reynolds wrap aluminum foil) and also ownNabisco. This diversification is partly to downplay the tobacco production of the companieswhich is currently under fire. Also, the companies are preparing themselves for the future, inwhich cigarettes and tobacco might prove too costly to produce. However, despite thisdiversification in the cigarette businesses, tobacco is still a huge commodity to the UnitedStates. In 2006, there was $90 billion in tobacco products sold in the United Sates. This is vitalto many of the southern states where a large percentage of tobacco is grown. North Carolinaand Kentucky accounted for over two-thirds of this production. Tobacco remains a vital part ofthe economies for these states.Externalities:Cigarettes and the tobacco industry are plagued by many negative demand externalities. Themajor one they encounter is the health risk associated with them. More than 400,000 people dieevery year due to various cancers, heart diseases, and strokes caused directly from smoking.This significant health risk has been ignored for years but is starting to become a serious issue.Many other negative externalities are faced by smoking and smokers, such as not being able tosmoke in most public buildings and many people find the smell of smoke on someonedisgusting. Also, many of the more positive externalities of demand, such as being cool if yousmoke, are being destroyed as only a myth to encourage people to smoke. Gone are the daysof celebrities promoting smoking. Now they hide the fact, as it is almost a publicembarrassment. The following illustrates this negative demand externality. A downwardslopping demand curve D represents the private value of cigarettes. However because of thesenegative effects, the social value is much lower (represented by another downward sloppingcurve D* below the D curve). This lowers the price and quantity sold. To help negate theseeffects, the government internalizes the externality, by taxing the product. Cigarettes are taxedheavily, with taxes representing about one-third of the price of a package (Center for DiseaseControl Website).Most of the production externalities are positive for tobacco companies. Tobacco represents alarge cash crop and puts a lot of people to work. Tobacco is grown and made relatively pollutionfree. The economies of many localities are dependent upon tobacco. Overall, the production ofcigarettes and tobacco create jobs and bring in money for localities.Problems for the market:Smoking as a market is currently facing trouble. Large class-action lawsuits are in place againstthe tobacco companies in an attempt to compensate for losses due to the illnesses that tobaccocauses. States are beginning to score big in the courtroom with cigarette companies. Thismonth alone, Pennsylvania and New Jersey were paid roughly $336 million (PhiladelphiaInquirer). Many other states are receiving similar payments. Eventually, these costs will bankruptthe tobacco companies.The industry has been criticized for years about targeting minors with their product. Joe Camel,until he was discontinued in 1997, was just as recognizable to six year olds as Mickey Mouse orRonald McDonald. Also, 91% of six year olds could correctly link him to cigarettes (AmericanMedical Association website). Almost 100 million packs of cigarettes are sold to minors everyyear, all illegally. This makes the market a largely illegal one as a large percentage of its usersare underage. The following chart from the CDC website shows the ages that people beginsmoking daily. Roughly three-quarters began smoking daily before they were of legal age tosmoke.Conclusion:The market for cigarettes and tobacco has a rich and important history. Despite still doing a lotof business, the market is in a decline and heading for trouble. Problems with its illegal targetaudience and cancer-causing product will catch up to the market and drag down its profits. Withmore negative externalities then positive ones, cigarettes also face other challenges. All thisadds up to a questionable future for an industry that was once vital to our country.Section IIThe law of demand states that all other things being constant, the quantity demanded of a productdecreases as the price of the good increases. The quantity demanded of a product, the amountof the product that consumers are willing to buy, depends on several factors. They include theconsumers income, the price of related goods, tastes, and expectations of that good. Thesefactors can change the quantity of a product that the consumer demands.Income:A factor that can change the quantity demanded of a product is the consumers income.Cigarettes are normal goods. This means that as the income of the consumer increases, thequantity demanded increases. The consumer is able to afford more cigarettes now that hisincome is higher. This shifts the demand curve to the right. As the income of a consumerdecreases, the quantity of cigarettes that they will be able to buy will decrease. When theconsumer can no longer afford to buy any cigarettes and the quantity demanded becomes zero,they will be forced to quit smoking.Expectations:Peoples expectations about the future will change the demand for cigarettes now. Right now,there are a lot of negative expectations with cigarettes. Cigarettes are known to cause veryserious health problems. According to the British Columbia Ministry of Health and the MinistryResponsible for Seniors, cigarette smoke contains carbon monoxide which leads to heartdisease, cadmium which causes lung and prostate cancer and kidney failure, and benzene whichcauses leukemia and anemia. That does not include the negative effects cigarette smoke has oninnocent bystanders and children with parents that smoke.Children with parents that are smokers are more prone to bronchitis and asthma. Smoking canlead to many severe diseases. Now, public service billboards and commercials help to informpeople of the consequences of smoking cigarettes. Because people are becoming more awareof the problems associated with smoking, fewer people will be willing to start smoking cigarettesor they are encouraged to stop smoking. Therefore the quantity demanded of cigarettes hasgone down in the past few years according to ThinkQuest. This will shift the demand curve totheleft. Also, people that are aware of the health consequences of smoking cigarettes sometimeswill turn to smoking light cigarettes which has increased the demand for light cigarettes over thepast few years. This means that the demand curve will shift to the right.However according to the British Columbia Ministry of Health and the Ministry Responsible forSeniors, light cigarettes contain just as much tar and other harmful toxins as regular cigarettes.Almost two-thirds of the people that smoke light cigarettes believe that there is a reduced amountof tar and nicotine in light cigarettes and if they knew that light cigarettes were actually just asharmful as regular cigarettes, one-third of them would quit smoking. Since more people wouldbequitting smoking, this would reduce the demand for cigarettes if the consumers were betterinformed of the dangers of light cigarettes. Also, according to Dateline, the government plans onincreasing the taxes on cigarettes. People then might expect the price of cigarettes to increasein the future to a point where they will no longer be willing to buy them. This will encouragemorepeople to stop smoking before the government implements the tax which would cause thequantity demanded of cigarettes to decrease and the demand curve to shift to the left.Substitutes and Compliments:Substitutes are two products that when the price of one product increase, the demand for theother product increases. Consumers would rather buy a similar product than pay more for theproduct they usually buy. Cigarettes have many substitutes. For example, chewing tobacco andcigars are substitutes for cigarettes. Also many people decide to roll their own cigarettes usingtobacco and paper. As the price of cigarettes increases, more people would buy the substitutesinstead of the cigarettes. This would shift the demand curve to the left. The opposite is true thenwhen the price of the compliments of cigarettes such as cigars increase. An increase in the priceof the compliment would lead more people to purchase the compliment. Therefore, the quantitydemanded of cigarettes would increase and the demand curve would shift to the right.Compliments are two products for which an increase in the price of one product causes adecrease in the demand for the other product. Cigarettes do not have any compliments.Taste:People buy the products that they like. According to the Economic Research Service, peoplehave developed preferences to specific qualities and brands. Each brand then has differenttypes of cigarettes that are available to the consumer. Some types include the light cigarettes orhave different shapes. For example, some cigarettes are longer and thinner which increase thetime it takes to smoke it. Also there are light cigarettes and other types of cigarettes that claimnot to contain as much nicotine and tar in them. Consumers will then buy whichever cigarettesthey prefer.You are to critically analyze the content of the web project identified above.You are to apply what you have learned in this class regarding critical analysis to specifically identify what is, and is not correct analysis, statements or conclusions in the cigarette case study. You will find errors in this project that are to be identified and corrected.1. Briefly summarize the content of the project.2. Identify the major points you want to critique or are going to analyze. This may include a topic or topics the project should have discussed but did not. For example, elasticity of demand,marginal utility, market structure, etc.3. Describe and explain what you believe is correct, and why, within each major point.4. Describe and explain what you believe is incorrect or erroneous, and why, within each major point.5. Identify what microeconomics analysis tools should have been incorporated within the web project, but were not. For example, elasticity of demand.6. Support your analysis with explanation


Paper#56068 | Written in 18-Jul-2015

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