Cigarettes Econometric Model

INTRODUCTION

AIM OF COURSEWORK

The research in this report is motivated by a desire to better understand the market for

Cigarettes in UK through the application of economic tools and analysis. The focus is on the demand side of the market – cigarette consumption. This report creates an econometric model of consumption of cigarettes in UK. The model identifies the key economic factors that determine cigarette consumption and tests the degree of influence of those factors on consumption.

WHAT IS MICROECONOMICS?

The branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households. It is concerned with the interaction between individual buyers

The use of nicotine patches and gum, which are intended to reduce depended on cigarettes has helped many smokers to give up on smoking. Cigarette and nicotine replacement product are substitutes good. According to cross elasticity of demand for substitute goods will always positive because the demand for one good will increase if the price for another good increase. For example, the price of nicotine replacement product increase, the quantity demanded for cigarette will increase as smoker switch to alternative option. On other hand, the coefficient for compliments will be negative. For example, if the price of nicotine replacement product increase, the quantity demanded for ashtray or lighter will drop as consumer will purchase fewer cigarette. If, the coefficient is 0, then the two goods are not related. A rise in price of nicotine products will cause a fall in demand for cigarette. For example, if the price of nicotine products increase, the quantity demanded for cigarette will increase as some smoker still prefer smoking. There are some replacement product, which substitute move effectively since the nicotine replacement product are poor substitute. Some smoker do not give up on cigarette that’s gives little impact, so the cross elasticity = 0.Finally, nicotine replacement product are unlikely to impact on some people who just starting to

This implies taxation may be ineffective in reducing smoking and a very high tax is required to have an impact. Furthermore, magnitude of taxes on cigarette, this is very large and so must have a significant effect on reducing smoking. Beside that taxation may be ineffective for “socially disadvantaged” group as many still smoke. Poorer smokers my lack access to treatments for quitting. Moreover, it’s difficult to determine impact of high taxes on cigarettes from another factors causing a decrease in demand and the high taxes have encouraged tobacco smuggling. This may represent a government failure since considerable loss of tax revenue according to HMRC. Finally, the tobacco Manufacturers Association estimate that 27% of all cigarette consumed in 2006 were non-UK duty paid. This implies that many were breaking the