South-Western College Publishing - Economics  
Tobacco Sales Down: Who Is To Blame?
Subject Comparative statics
Topic Supply and Demand, Equilibrium
Key Words Purchases, consumption, suppliers, sales, manufacturers, taxes
News Story

Tobacco farmers in the U.S. are selling less and less tobacco. A report by the Campaign for Tobacco-Free Kids shows that cigarette manufacturers reduced their purchases of U.S.-grown tobacco by 21 percent between 1995 and 1997, far in excess of any reduction in cigarette consumption in the U.S. Instead, the industry is buying more from overseas suppliers. This trend is likely to continue, according to the tobacco industry. They blame some foreign governments for requiring cigarettes to be manufactured in the same country in which they are sold, and the weak economies of Russia and Asia which have curbed cigarette sales.

However, in addition, the cigarette manufacturers state that the tobacco growers have also been hurt by the actions of groups such as the American Cancer Society and the American Lung Association which have advocated higher taxes on cigarettes and smoking restrictions.

(Updated February 1, 1999)

1. The tobacco industry alleges that taxes and smoking restrictions have led to lower sales by tobacco farmers.
  a) Draw a diagram of the market for cigarettes. Show the supply and demand curves and mark the initial equilibrium price and quantity.
  b) Show how restrictions on smoking may have affected the equilibrium price and quantity. Why did you shift the curve you did?
  c) Now show how taxes on cigarettes influenced the equilibrium point. (Hint: unit taxes have a similar effect to higher input prices). Why did you move the curve you did?
  d) Overall, what was the effect of taxes and restrictions on the amount of cigarettes traded? What was the overall effect on the equilibrium price?
2. Now examine the implications for the tobacco farmers in the market for tobacco.
  a) Draw a supply and demand diagram of the market for U.S. tobacco. Mark the equilibrium price and quantity.
  b) How would the changes in the market for cigarettes be reflected in the market for tobacco? Specifically, which curve would move and why? Illustrate the implications for the equilibrium price and quantity of tobacco.
3. The public health groups emphasize that the cigarette manufacturers are using overseas sources of tobacco at the expense of domestic tobacco.
  a) Draw another diagram of the market for U.S. tobacco. Mark the initial equilibrium.
  b) Show how using overseas suppliers affects the domestic tobacco market. Explain why you shift the curve you do, and mark the new equilibrium price and quantity.
Source Wendy Koch, "Report alleges tobacco treachery," USA Today, December 14, 1999.

Return to the Equilibrium or Supply and Demand Index

©1998  South-Western College Publishing.  All Rights Reserved   webmaster  |   DISCLAIMER