The Uprising Price of Cigarette

Based on October 3rd Star (excerpts):

PETALING JAYA: Cigarette prices are expected to go up tomorrow by 70 sen for a pack of 20 sticks.

According to a report by a Chinese daily, most 20-stick packs, which is currently sold at RM9.30, will cost RM10.

Quoting sources, the daily reported that the 70 sen increase is one of the highest in recent history, with previous hikes being between 10 and 30 sen.

Packs of high-grade cigarettes are expected to cost as much as RM14.

From the article, we know that the price of cigarettes will increase by 7.5%. This means that the price will increase to 70 sen per pack, so the price increase from RM9.30 to RM10. Other than that, the forecast show us about the cigarettes sales will drop by 10% due to the increasing of the cigarette. And at the same time, the high-grade cigarettes will cost as much as RM14.

In my opinion, the price of cigarette rising is because of healthy purpose. The increasing the price of cigarette is very good for the entire citizen in Malaysia, it will help the government to control the smoking rate in the area and it can also protect the environment. After the price has rising, the cigarette sales (quantity demanded) was drop by 10%, it was approved the concept from the Law of Demand. Which is the price is changing and all others factors are remain constant. Due to the concept, the quantity demanded will influenced by the price. In this article, when the price increase, the quantity demanded will decrease, it is an inverse relationship between price and quantity demanded, so it will causes the negative slope in the figure (a).For instance, in the higher prices period, smokers are not willing to buy more cigarettes, therefore, the quantity demanded of cigarettes are decrease and this will makes the point to move up­ along the demand curve. But at the same time, suppliers are willing to supply more cigarettes because supplier can get more profit right now, so it cause the quantity supplied increase and the point is move up along the supply curve, figure (b). 

Figure (a)

The Law of Demand is when the price increases, the quantity demanded decrease. And the point is move upward along the demand curve.

Figure (b) When the price increases, the quantity supplied also increase. And the point is move up along the supply curve.

Moreover, the complements goods of cigarette will also affected by the rising price. If the prices of cigarette increase, the quantity demand of lighter (complement good) will decrease. It is because smokers would not buying lighter when they have no cigarette. Therefore, the selling rate of lighter is decreasing. Other than complement goods, substitute effect and income effect will occurs and it is the reason why the quantity demanded will drop. For instance, substitute effect is smokers will seek for other goods to replace cigarette since the price of cigarette is higher than the previous price. Smokers are addicted to smoke and they cannot live without cigarette, so they will seek for shisha to replace cigarette. While income effect is when the smokers’ income remaining; smokers cannot afford all the things they bought previously, so the quantity demanded of cigarette will decrease. If the price of cigarette increasing, and consumers are not able to purchase it, the quantity demanded of cigarette will decrease due to the income effect. In this time, smokers will seek for the shisha to replace cigarette since the price of cigarette increase therefore, the quantity demanded of shisha increase.

In other way, if both smokers and suppliers can expect the future price, they will protect their own benefit when they are buying or selling the good right now. Every time when suppliers know the price of cigarette will increase, they will supply lesser by now and increase the quantity supplied when the price is higher in the future. Meanwhile, smokers will demand more on cigarette when the price is lower rather than higher. Both of them are in the opposite side. It will cause the changes in supply or demand. It means that, the demand curve or supply curve would shift to left or right just depends by the factors and not the price. Let us take the example from the article; the current supply curve will shift to the leftward (decrease in supply), figure (c). It is because the future price of cigarette will increase, suppliers want to earn more profit, and therefore, they decrease their supply now and increase the supply in the future. While demand curve is always opposite with the supply curve, for instance the current demand curve will shift to the rightwards (increase in demand) right now, figure (c). The other factors that could make the supply curve shifting are population, preferences, income, expected future price, substitute goods, technology, and number of supplier. 

When the demand curve shift to the right, it means that the quantity demanded had increased. And the supply curve shifts to the left, the quantity supplied decrease. So the efficient quantity of the product is increasing in the shifting the demand curve and decrease in the shifting the supply curve. 

Before the price going up, we need to combine both supply curve and demand curve, and we will get the equilibrium quantity. Equilibrium quantity is quantity demanded equal to quantity supplied (QS=QD) and it is the balance between smokers and suppliers. When the QS=QD, it means that both supplier and smokers are agree with the price and they are willing to supply and buy in that amount. For instance, supplier is willing to supply 11 thousand pack of cigarette in RM11 for each pack. Meanwhile, buyers are willing to pay RM11 for each pack of cigarette. Hence, there is an equilibrium point in both suppliers and smokers. But when supply more than demand, it is a surplus between both of the curve, figure (d). It means that suppliers will supply the goods more than what consumers wanted. While shortage is demand more than supply and it is consumers wanted more than suppliers willing to supply. In order to eliminate this kind of matter, I agree that both suppliers and smokers can sell and purchase the cigarette with the equilibrium price.

Figure (d) The graph is telling us that when the price up to RM10 per pack of cigarette, the quantity demanded will decrease, therefore the cigarette will become surplus. It is because the quantity of cigarette that supplied by supplier is more than what smokers want. Thus, the surplus is occurring in this period.

While suppliers overproduce (Qs) the cigarette, it causes the market failure and deadweight loss will arise, figure (e). When the loss is occurs it will also influence the social loss. For my opinion, I think that government should use the price floor to control the market. It is because smoking will influence the health of human and cigarette including nicotine. Nicotine is an ingredient that will affect the blood system in smokers’ body. Therefore, government should take it serious than others. By the way, if government set the price floor to control the price, sellers cannot sell it lower than the price floor, because it is illegal, figure (e). For instance, if government set the price floor for cigarette at RM15 per pack, the quantity demanded will decrease. Using price floor, the price will be pull up and the quantity demanded will decrease. Because of raising the price, smokers cannot afford to buy the cigarette that they able to buy previously. Although government will pay more attention in the pricing of cigarette, but black market also will occurs and earn their profit there. In black market the illegal arrangement is only made between buyer and sellers. In this special period, government must pay more attention and do more spot check in the particular department. In my opinion, price floor is a best solution to decrease the quantity demanded of smokers. Meanwhile, the healthy rate of citizen could be increase. 

Figure (e) The price floor is set above the equilibrium price and it will affect the quantity demanded and quantity supplied. The illegal arrangement is occurs when the price set below price floor. Price floor will also make the S>D to cause the surplus in the market.