Econometric Model Of Cigarettes

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

When cross elasticity of demand is positive, the related goods are substitutes. For example, price of cigarette increase from RM12 to RM13 per box and the demand for patches and gum increase from RM0.50 to RM0.60 per year, the cross elasticity between two product is positive. Knowing the cross elasticity of demand and other related products enable the firm to map out its markets. Mapping allows a firm to calculate how many rivals it has and how close they are. It’s also allow the firms to measure how important it. Complementary products are its own products. This knowledge allows the firms to develop strategies to reduce its exposure to risks associated with price changes by other firms such as rise in the price of complementary or a fall in price of substitution. So, the firm always try to reduce risk including adopting Alliance and collusion strategies. Joint alliance with competitors can also take place, such as Cigarette Company combining with other company to create nicotine gum and patches. Finally, collusion is also positive, for example firm may enter price fixing agreement so that they avoid fight on

The cigarette and tabacco industry takes advantage of these loopholes to avoid paying the full amount of taxes. The resulting loss of revenues for the government and the difficulty to translate into price increases and reduced affordability for consumers makes these taxes and tax increases ineffective.smoking. Following a strong battle by the government with support from civil society groups against resistance from the tobacco and cigarette industry, a tobacco tax reform was adopted in 2012. In addition, a provision was introduced to have automatic annual increases in the tax until 2017, with more rapid tax increases on lower priced brands.Since implementing the reform in 2013, the Government reports that tobacco prices have gone up, sales have gone down and revenues have increased