Demand for Cigarettes

Based on an article from The Star newspaper (http://thestar.com.my/news/story.asp?file=%2F2012%2F9%2F14%2Ffocus%2F12024429&sec=focus), the increasing cost for common cigarettes due to taxes has triggered a great demand for illegal cigarettes for the last few months. For many decades, the Malaysian government had search for different ways to avoid the people of Malaysia to giving up their smoking cigarettes routines. From campaigns, to marketing, to radio advertisements, none of their words have seemed to have an impact on the variety of casual smokers in Malaysia. In fact, the variety of population that smoking is increasing. This causes the Malaysian Government to consider increasing the cost of cigarettes by 2 times in the coming years. The government plans to encourage a higher tax rate on smoking to increase the cost of one box cigarettes. So what are the consequences of them doing so?

The results of smoking cigarettes can be terrible such as lung cancer, hypertension, slower reaction & response time and many other more. If the government does decide to encourage a higher tax on the cigarettes, the cost of one pack on a cigarette will definitely increase significantly. The law of demand in business economics declares that when "other things remain the same, the higher the price of a good, the smaller the quantity demanded of the good" and vice versa. Obviously with a higher cost this will reduce the quantity demanded of these cigarettes in Malaysia. This will make cigarettes an elastic good. You're probably thinking why individuals weary when the cost is higher? This is known as the income effect; where individuals reduce their everyday purchase due to the loss of buying power. Referring to the picture below, Alex Hong is an everyday cigarette smoker who smokes 2 packages of cigarettes a day which cost him RM10 for each pack. When the cost increases for a pack of cigarettes by 2 times (RM20), Alex Hong might reconsider smoking 1 pack of cigarette a day as his buying power has reduced. Other none regular cigarettes smokers would stop smoking cigarettes as there is no other alternatives for smoking cigarettes rather than alcohol or illegal cigarettes.

However, although this might be the situation of common cigarettes, a huge increase in cost will definitely reduce the quantity demanded by customers on cigarettes packs. Due to the substitution effects, customers will search for other alternative resources of that particular item which so happens to be illegal cigarettes in this situation. Even if the government tries to increase the cost of cigarettes through taxes, this would not stop Malaysian smokers from smoking cigarettes as they can easily change to a less expensive alternative item such as illegal cigarettes. The demand for illegal cigarettes will continue increasing, as the cost for one pack of illegal cigarettes is continuous and has not been change for the last 10 decades staying at RM2 to RM3.50 per packs. Example, Christen has two options to choose between two generic items which are BMW and Mercedes. Both items have relatively the same cost, each an alternative for one another. When the cost of BMW enhances after a recent economic malfunction, and Mercedes continues to be the same, the sensible choice to do for Christen to do is to buy the less expensive brand. BMW is the alternative of Mercedes. Therefore when the cost (P) for BMW increases, the demand (D) for the Mercedes will increase. This shows the similar situation on common cigarettes and illegal cigarettes. When the cost of common cigarettes increases, the quantity demanded for illegal cigarettes increases as well. My feedback however, is what the government would actually do to avoid such evaluate from happening?

However there is one way to increases the cost of illegal cigarettes and that is through market equilibrium. Supposing the illegal cigarettes have a transparent market, all the government needs to do is to cut off the supply chain of illegal cigarettes. From the article above, it mentioned that Malaysian Maritime Enforcement Agency has been definitely patrolling the Coastal waters. As well as the Royal Malaysian Customers that is putting their most initiatives in guaranteeing no illegal smuggling of cigarettes into the country. Although it might be difficult to capture all the smugglers, decreasing the quantity of supply in illegal cigarettes will causes a lack of illegal cigarettes in the marketplace. There will be too much quantity demanded of illegal cigarettes with very little stock to supply the customers. So what do supplies do? Following the market equilibrium concept, the supplies will have to increase the cost in order to reach equilibrium cost. By doing so, this will increases the cost of illegal cigarettes decreasing the quantity demanded of illegal cigarettes. This is the only way to stop the growth of cigarettes smokers in Malaysia.

My feedback is that the government is not doing enough to avoid smoking cigarettes. There should be more guidelines that makes sure and avoid smoking cigarettes in Malaysia. I am not a professional in these areas, but I believe there are individuals working in the power that can come up with better concepts. Taxation has been the primary earnings for almost all government authorities. However the individuals should be focus on for their best needs which are health in this situation. I am willing to see what the long run of tobacco and smoking cigarettes in Malaysia as many different concepts are adopting to stop this health damaging action. Modifying the Malaysian areas choice cannot be done in a short run. Other factors such as flavor, objectives, disposable income and many other more has to be taken into account when the government wants to reduce the demand of cigarettes in the marketplace. However, this might be the first step into accomplishing their definitive goal in the long run.

Reference

Shahrul Azamin Abdullah 2012, Negative impact of drastic hike, viewed 1^st June 2013, <http://thestar.com.my/news/story.asp?file=%2F2012%2F9%2F14%2Ffocus%2F12024429&sec=focus>

O'Sullivan Arthur, Steven M. Sheffrin 2003, Economic Principle in action , Upper Saddle River, New Jersey 07458: Pearson Prentice Hall, viewed 1^st June 2013, pp. 81–82.

Ewa Kretowicz 2013, Illegal tobacco haul down as demand drops, viewed June 1^st 2013, <http://www.smh.com.au/national/illegal-tobacco-haul-down-as-demand-drops-20130112-2cmet.html>

John Blau 2012, Tobacco industry taps into Asian smoking demand, viewed 1^st June 2013, <http://www.dw.de/tobacco-industry-taps-into-asian-smoking-demand/a-16175654>

Read More

New Recommendations required to Cigarettes market in Malaysia.

In an article from a latest The Star Newspaper September 3, 2012 (http://thestar.com.my/news/story.asp?file=/2012/9/3/nation/11959171&sec=nation), new recommendations have been required to the cigarettes market in Malaysia following an anti-smoking plan led by the Government.

This way of government intervention is price floor, which is one of the two types of price control. By presenting a minimum price, customers will not get to buy the item at a discounted price from the amount that was set. Government uses price floor to restrict prices from getting too low by fixing it above the price equilibrium. This will cause the quantity demanded to drop, especially among customers with low earnings. However, this will not impact wealthy customers as they have enough money to pay for the price that is above the equilibrium level.

However, the council chairman for Malaysian Council for Tobacco Control, Dr Molly Cheah, doesn't agree that developing a price floor will make a significant effect on the present revenue of cigarette packs in Malaysia as it is not enough for devoted tobacco users to punch away the habit. She seems that having a stricter ceiling price would have been a better option of action by the Government and even though such option will motivate illegal cigarettes being smuggled into the nation, she considers that it is the responsibility of Customs Department to deal with and negotiate that issue.

If the price ceiling for cigarettes is further required, suppliers will not sell as much which will cause shortage of cigarettes in the marketplace. Shortage is determined as the “situation where the quantity available or supplied in a market falls short of the quantity demanded or required at a given time or price”. Thus, customers will not get to buy as much as they used to as there are lesser quantities in the marketplace and this will gradually lead to lower revenue. Eventually, an incident known as black market might happen due to this judgment. Richer customers will be more willing to spend more to acquire the cigarettes available at a cost above the price ceiling, which is against the law.

 Honestly discussing, price control news for cigarettes is no longer amazing to Malaysians as actions to reduce the revenue have been performed for decades. Back truly, prices of cigarettes were increase by 70 cents per package of 20 sticks of cigarettes which is by far the biggest price increase recently as past rise was between 10 cents and 30 cents. It was predicted that following the supply and demand concept, the requirement for cigarettes of would reduce when the price goes up.

Following the news (http://news.malaysia.msn.com/regional/article.aspx?cp-documentid=4375966) of the cost escalation in 2010, according to the chief executive of Federation of Sundry Goods Merchants’ Association, Trim Hing Chuan approximated that the increase in of 70 cents in the price of cigarettes would cause a 10% fall in the sales of cigarettes. A loss of revenue of cigarettes was documented from 14,086 million in 2010 to 13,758.9 million in 2011 after the price increase in 2010. However, the amount was far from the approximated 10% decrease as it has only decreased by 2.3%. Despite the frustrating figure, time and extra strict guidelines to prevent the smoke revenue might confirm the forecast to be right as there is a significantly large loss of 20.3% in a period of 5 years from 2006 to 2011.

The purpose for the crawling effect could probably be due to exterior factors such as the behavior of the customers themselves. Despite the increase in price, these customers find it much simpler to invest extra price than to actually stop the addiction. It was revealed that a few cigarettes users revealed that the costs may be challenging for them but it is not likely that they will give up on smoking cigarettes because of it. A retired person known as Wayne even described that, he turned to purchasing illegal cigarettes that are smuggled into the nation. In business economics phrase, it could be said that cigarettes are an inelastic goods. Inelastic goods have a nearly constant demand a rise in price which is applicable in this situation.

I believe that the revenue of cigarettes in Malaysia is decreasing at a slower speed due to many customers who are unfazed by the price control set by the Government. The drop in revenue is also not making much of a result as customers end up deciding for other possible choices that are against the law such as black market and smuggled products to acquire their pack of cigarettes. Thus, the decreased revenue of lawful cigarettes regionally do not actually signify that is it effective in avoiding Malaysian customers from buying them and hence, the tighter guidelines required enforced the local smoke industry is not effective in decreasing the requirement for cigarettes.

Reference

Caleb Yeoh 2010, Biggest price hike for cigarettes so far, viewed 1^st June 2013, <http://news.malaysia.msn.com/regional/article.aspx?cp-documentid=4375966>

Regina Lee 2012, More rules to deter smoking New Price Control on Cigarettes introduced, viewed 1^st June 2013, <http://thestar.com.my/news/story.asp?file=%2F2012%2F9%2F3%2Fnation%2F11959171&sec=nation>

Davig Begg 1994, Economics, 4th edition, McGraw-Hill , viewed 1^st June 2013, pp. 40-43

Read More