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Case Study 3 - Change in Demand and Quantity Demanded

Public policymakers aim to reduce smoking through policies that shift the demand curve for cigarettes leftward, such as health warnings and advertising bans, resulting in lower quantity demanded at any given price. Alternatively, cigarette taxes raise prices, causing movement along the demand curve to a higher price and lower quantity point rather than shifting the curve. Economists have found that a 10% price increase reduces cigarette quantity demanded by 4% for adults but 12% for teenagers, and studies show tobacco and marijuana are complements rather than substitutes, with lower cigarette prices associated with greater marijuana use.

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57 views

Case Study 3 - Change in Demand and Quantity Demanded

Public policymakers aim to reduce smoking through policies that shift the demand curve for cigarettes leftward, such as health warnings and advertising bans, resulting in lower quantity demanded at any given price. Alternatively, cigarette taxes raise prices, causing movement along the demand curve to a higher price and lower quantity point rather than shifting the curve. Economists have found that a 10% price increase reduces cigarette quantity demanded by 4% for adults but 12% for teenagers, and studies show tobacco and marijuana are complements rather than substitutes, with lower cigarette prices associated with greater marijuana use.

Uploaded by

Satish
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Case Study

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Shifts in the Demand Curve versus Movements along the Demand Curve
Public policymakers often want to reduce the amount that people smoke because of
smoking’s adverse health effects. There are two ways that policy can attempt to achieve this
goal. One way to reduce smoking is to shift the demand curve for cigarettes and other
tobacco products. Public service announcements, mandatory health warnings on cigarette
packages, and the prohibition of cigarette advertising on television are all policies aimed at
reducing the quantity of cigarettes demanded at any given price. If successful, these policies
shift the demand curve for cigarettes to the left, as Figure (a).

If warnings on cigarette packages convince smokers to smoke less, the demand curve for
cigarettes shifts to the left. In Figure (a), the demand curve shifts from D1 to D2. At a price of
$2.00 per pack, the quantity demanded falls from 20 to 10 cigarettes per day, as reflected by
the shift from point A to point B. By contrast, if a tax raises the price of cigarettes, the
demand curve does not shift. Instead, we observe a movement to a different point on the
demand curve. In Figure (b), when the price rises from $2.00 to $4.00, the quantity demanded
falls from 20 to 12 cigarettes per day, as reflected by the movement from point A to point C.
Alternatively, policymakers can try to raise the price of cigarettes. If the government taxes
the manufacture of cigarettes, for example, cigarette companies pass much of this tax on to
consumers in the form of higher prices. A higher price encourages smokers to reduce the
numbers of cigarettes they smoke. In this case, the reduced amount of smoking does not
represent a shift in the demand curve. Instead, it represents a movement along the same
demand curve to a point with a higher price and lower quantity, as in Figure (b).

How much does the amount of smoking respond to changes in the price of cigarettes?
Economists have attempted to answer this question by studying what happens when the tax
on cigarettes changes. They have found that a 10 percent increase in the price causes a 4
percent reduction in the quantity demanded. Teenagers are found to be especially sensitive to
the price of cigarettes: A 10 percent increase in the price causes a 12 percent drop in teenage
smoking. A related question is how the price of cigarettes affects the demand for illicit drugs,
such as marijuana. Opponents of cigarette taxes often argue that tobacco and marijuana are
substitutes so that high cigarette prices encourage marijuana use. By contrast, many experts
on substance abuse view tobacco as a “gateway drug” leading the young to experiment with
other harmful substances. Most studies of the data are consistent with this latter view: They
find that lower cigarette prices are associated with greater use of marijuana. In other words,
tobacco and marijuana appear to be complements rather than substitutes.

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