The price of goods and services is one of the factors that the consumers consider before making decisions on what they need to purchase.The law of demand shows how demand of a commodity changes as own price changes. Price elasticity of demand is an indicator of the rate at which the demand of a commodity would increase as price falls and vice versa.
The price elasticity of demand of a commodity could be influenced by several factors like the amount of substitute goods available in the market where the good is sold. Substitutes are those commodities which can be used to serve the same needs. Other factors include time period, the degree of luxury and necessities or the time period that might influence the consumers’ preferences and taste. Change in income or price of a related commodity also affects the demand of a product (McConnell, 2007).
This essay is a presentation concerning the facts about price elasticity of demand and the key issues that relate to it. For instance, the case to determine as to whether mentally ill persons have a perfectly inelastic demand for alcohol and cigarettes, whether alcohol consumption tends to rise in bad times, the effects of taxes on cigarettes, on alcohol consumption and the cross elasticity of demand of the two products. It also determine, whether binge drinking, which is common among college students is sensitive to alcohol prices as well as the conclusions and recommendations concerning the issues.
Mentally ill persons and alcohol and cigarettes consumption
It has been noted that many persons who are mentally ill consumes cigarettes and alcohol in order to continue financing their addiction. Mentally ill persons have both perfectly elastic demand as well as perfectly inelastic demand as far as cigarettes and alcohol is concerned. All factors held constant, an increase in price cigarette taxes will imply an increase in alcohol consumption.
Mentally ill persons have a perfectly elastic demand for cigarettes and alcohol in that they tends to switch to the consumption of substitutes once the price rises of either cigarettes or alcohol rises. They are thus responsiveness as far as price is concerned and so they will be forced to either change to a substitute or quit the consumption of alcohol or cigarettes altogether. Mentally ill persons have the capability of quitting the consumption because they’re not conscious of what they really require for consumption and may be they only consumes the product once they sees others doing so.
Perfectly elastic demand refers to a situation whereby the quantity demanded is responsive with regards to price changes i.e. the consumers attempt to switch to close substitutes once they face a price increase. The mentally ill person’s consumption of drugs and cigarettes depends on the availability of substitutes, how well the substitute can be used to replace the service or good being considered. For mentally ill persons, alcohol is the main substitute for cigarettes and therefore, they will switch to the consumption of cigarettes once the alcohol prices increases (Hubbard, & Obrien 27)
The price tends to be perfectly inelastic for mentally ill persons as they consider both the alcohol and cigarettes as necessities to the mentally ill persons. This is because the habitual forming of these products will have a greater level of elasticity. In this case however, the mentally ill persons regard alcohol and cigarettes as necessities and so their main concern being addiction, they will appreciate either product that is readily available to them without necessarily defining the product. They will thus try everything including stealing money or borrowing from friends and other family members in order to buy the cigarettes and alcohol in an effort to satisfy their addiction (Arnold 12).
As mental illness affects the consumption level of the addictive goods such as cigarettes and alcohol the research by Cook, Philip & Moore, 2001 shows that mentally ill persons are price responsive and recommends that higher taxes should be imposed since the consumption rate will reduce.
Alcohol consumption and bad time
Alcohol consumption depends on the various moods of the people as well as the economic conditions.According to the National Bureau of Economic Research, alcohol is considered as an inferior commodity as well as a normal good. An inferior product refers to a commodity whose quantity demanded is usually negatively related to the level of income. Alcohol is an inferior commodity because its consumption tends to increase in bad times because many people regards alcohol as means to relief their stress. During Such bad times as death of a loved one or any other situation where people are filled with grief, consumption of alcohol rises because people wish to forget about their sorrows (Ruhm 16).
During such times as the economic recession, there are many job losses across the country and so the consumer’s disposable incomes hence forcing them to cater for the current situations and save the little amount at their disposal so as not to lack the basic things. The demand for alcohol therefore decreases. The basic necessities such as food, clothing, education, health and shelter are given priority and alcohol is considered as a luxurious commodity (Baumol & Blinder 18).
On the other hand during harsh economic times, some people decides to consume alcohol so as to not to come into terms with the worsening economic conditions. They thus seek some relief in and this reflects that alcohol is an inferior commodity. Economic depression usually leads to psychological depression among people making them unhappy and to drink more alcohol. A person who is having financial burden may opt to join his or her friends in a drinking joint and take alcohol so as to get rid of stress (Frank 36).
Thus alcohol is considered as a normal good because when the income rises, many people seems to visit their usual drinking places they considers drinking as their alternative leisure activity as a result of the availability of the disposable income. People also tends to alter their behavior of alcohol consumption in that they tends to take more alcohol change their type of alcohol as a result of increase in their income (Ruhm 14).
Effects of cigarette taxes and smuggling on the consumption of alcohol
Many countries impose higher taxes on cigarettes and other tobacco products so as to discourage the consumption of the same and also to help balance their budgetary deficits. An increase in cigarette taxes denotes a lower propensity to smoke and the higher propensity of an individual to quit or to reduce smoking. Cigarette smokers tend to resort to alcohol consumption or other alternatives following the increase in cigarette smoking instead of totally quitting smoking. When the taxes for cigarettes increases, consumers may totally or partly move their demand to the less taxed products in this case being the beer so as to counter the effects associated with the same.
Smuggling of cigarettes on the other hand leads to a reduction in the quantity demanded for alcohol. Despite the fact that smuggling is illegal, consumers will opt to buy cigarettes at lower prices and thus the consumption of alcohol will be greatly reduced because the consumers will have exhausted their disposable income with buying the cheap commodity i.e. the smuggled cigarettes. Cigarettes usually have an associated appeal to the potential smugglers due to the fact that the taxes contribute a higher portion of their prices and therefore making them to be very profitable for smuggling.
On the other hand, lowering the taxes on cigarettes will mean that consumers will opt to consume cigarettes and not consider much to consume alcohol. Thus the demand for cigarettes and alcohol with reference to taxes and smuggling is perfectly elastic in that it is responsive to the change of price and the change in quantity demanded for a close substitute (Ruhm 42).
Unfortunately, whenever there is a rise in taxes, an incentive for evading the taxes arises and so the evasion of the excise taxes on commodities by way of circumventing the control of borders amounts to smuggling. Therefore, goods are usually smuggled in order to evade the rules that prohibit their sale. Cigarettes are usually very appealing to the smugglers because their taxes counts more as far as their prices are concerned. Smugglers also have the effect of reducing the minimum revenue that results from cigarette taxes because an increase in tax rates results to a correspondent increase in smuggling rate and vice versa.
Elasticity between cigarettes and alcohol consumption
Both alcohol and cigarettes consumption decisions is usually addictive and not independent on the past choices. Cigarettes and alcohol are close substitutes due to their addictive nature and so they have cross elasticity relationship. Cross price elasticity of demand refers to the percentage ratio of a change in quantity demanded of a good x as a result of a change in price of a good Y.The cross elasticity between alcohol and cigarettes will be represented as; percentage change in quantity of Alcohol (Qa) divided by the percentage change in price of cigarettes (Pc). Thus cross elasticity of demand with regards to cigarette prices ═∆Qa/Qa÷∆Pc/Pc
Whether them cross elasticity of price is either positive or negative is dependent on whether the products are substitutes or compliments (Sean 17). Substitute products are those products that can be used to replace another e.g. beer and cigarette whereas compliment products are those products that must be use together e.g. pen and ink. Thus a price increase in cigarettes implies that consumers will shy away from buying the same and opt for alcohol as both commodities can be used in place of each other. The cross price elasticity for these two products will be positive because a rise in alcohol prices will make consumers to substitute with cigarettes and vice versa.
Binge drinking and alcohol prices
College students are regarded as the greatest consumers of excessive alcohol commonly referred to as outlets are usually licensed to operate near campuses. It is a major concern among the parents due to the effects of excessive drinking such as violence, injuries, deaths, car accidents, theft and vandalism among others.Binge drinking among college students is as a result of peer pressure, lack of proper parental guidance, excess pocket money, lack of alternative leisure activity, curiosity and experimentation e.t.c.
Over the past two decades ,there has been significant progress that has been done in an effort tom reduce the abuse of alcohol among college students and alcohol prices have been considered as an important factor for eradicating this vice and its consequences( Sloman 18).
Binge drinking among the college students is sensitive to alcohol prices in that binge drinking tends to rise as a result of reduction in alcohol prices. This is due to the fact when alcohol prices are reduced, the students will have excess cash to buy beer. Also, the students are generally considered to have low income and so they are very sensitive to alcohol prices and therefore a price drop will allow them a greater consumption. The reverse also holds true in that an increase in that as alcohol prices goes up, excessive consumption among the students will reduce because they will have low cash at their disposal for buying beer at large amount. As the affordability for cash declines, students also tends to change their drinking venue and thus they shifts from consuming alcohol in bars and other related premises to drinking the same at home usually sharing with their parents (McEachern 23).
Alcohol producers don’t have the capacity to raise the prices of alcohol so as to curtail excessive drinking by college students as they usually have little influence concerning the final price which the final consumer pays because pricing itself involves a number of players such as the government, retailers, and hospitality sectors among others. Although both male and female students are relatively inelastic with regards to binge drinking, female students are usually responsive to an increase in alcohol prices as compared to their male counterparts because males are participates in alcohol consumption severally as compared to females and thus developing addiction (Francis 1).
Binge drinking is rapidly increasing among college students rendering colleges to be polarized between abstainers and heavy drinkers and so, the government needs to come up with a policy that is aimed at increasing the tax for alcohol and also impose heavy measures on those sellers who sell alcohol below the set prices. When there is an increase in prices of alcohol, those students who are considered as heavy drinkers tends to shift the demand of alcohol to less expensive alcohol that may be of low quality and hence risking their lives due to the consumption of alcohol that do not meet the required standard (Arnold 12).
Mentally ill persons have the infinity ability of switching to the alternatives once the price increases by being perfectly elastic as far as the demand for alcohol and cigarettes is concerned and hence they would stop consuming the cigarettes and alcohol completely and this has the effect of lowering the quantity demanded. This will in turn render firms not to pass on taxes by increasing the prices and so the firms not have an alternative but to pay the costs by themselves.
There are reductions and increases in the consumption of alcohol as well as cigarettes in bad times such as during recession but the demand is usually for a given period of time after which the demand resumes its normal curve. Such expectations such as house price increases e.t.c.also have the effect of lowering the consumption of alcohol and cigarettes up to a given period of time.
.As long as other factors remains constant, the consumption of alcohol will not be affected by a mere change in price and so there is need for a holistic attack on binge drinking if the vice is to be eradicated completely. The abusive behavior among chronic problem drinkers will not be eradicated the same way as for the responsible consumers and indeed, the moderate and light drinkers are the ones who are most price sensitive while on the other hand, the heavy drinkers are considered as the least responsive as far as taxation and pricing of alcohol is concerned (Gartner 9).
The treatment of the mental illness should also be subsidized so that many people can receive treatment and this will reduce the consumption of cigarettes and alcohol as well.
For such college students who are addicted to alcohol consumption, the intervention methods should be used in an effort to discourage them from binge drinking and such methods include proper parental guidance, providing them with alternative leisure activity, introduction of drug and alcohol awareness campaigns in schools and the introduction of rehabilitation centers among others. According to Cook & Moore (1), advertising of alcohol should also be aimed at educating people on responsible drinking habits and should disclose all the adverse effects associated with binge drinking.
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