Cigarette Companies Essay

460 Words2 Pages
Wk 3 discussion 2: U.S. cigarette makers face enormous punitive damage penalties after losing a series of class-action lawsuits that heaped penalties amounting to several hundred billion dollars on the tobacco industry. In spite of the huge penalties, The Wall Street Journal reported, "The damage (to cigarette makers) is generally under control." What action do you suppose the cigarette companies took to avoid bankruptcy? Why did this action succeed? Fully explain the answer to these questions using elasticity, demand, supply, and market equilibrium. Respond to at least two of your fellow students’ postings. How can cigarette companies pay out millions in damages and still not have to file bankruptcy? The answer to this is simple due to the nature of the product. The book says that “price and quantity demanded are inversely related by the law of demand” (Thomas & Maurice, 2011, pg. 206). This does not prove to be true in a situation dealing with something of an addictive nature. As a past smoker, I know first-hand that cigarettes are very addictive. At one time I said that if cigarettes went up to $4 a pack I would quit smoking. By the time I finally quit, they were over $5 a pack, and I did not quit because of the price. This means that the prices of cigarettes are very inelastic. Being inelastic means that no matter how much the cost of something goes up, people will still buy the product/services. Due to this, cigarette manufacturers can raise the price of cigarettes to cover the lost wages due to the law suits. By increasing costs, they increase revenue, and the millions in law-suits do not affect them. They could evaluate their supply and decrease the supply (if in any way possible) which will lower the internal manufacturing costs, while still raising the revenue. This could prove to have a huge payout in the end. If this were done, the market equilibrium
Open Document