Irony: quitters are making tobacco companies rich

   ANALYSIS from the Economist:

When lots of people smoked, there were many “price-elastic” consumers. In plain English, they were sensitive to increases in the cost of a cigarette. As more people have quit, however, only the most committed smokers are still puffing. Companies have responded by raising prices at an ever-quicker pace.

MY COMMENT:  In chapter Chapter 6, the simple linear demand curves get more price elastic as price increases. But for cigarettes, higher prices make the more-price-elastic consumers stop smoking. The remaining smokers have less elastic demand, so demand becomes less elastic as price increases. This allows tobacco firms to raise price more--and earn higher profit--than they other otherwise would.

You can also understand this using the language of Chapter 14 (indirect price discrimination), with two groups of consumers with different elasticities of demand. At lower prices, both groups consume, but at higher prices, only the less-price-elastic group consumes. Firms optimally raise price and earn higher profit by serving only the less price-elastic group.

An obvious question raised by this interpretation is why didn't firms simply raise price so that the less elastic consumers quit and then reap higher profit from the higher prices. One possible answer is that the tobacco companies didn't know. It was only when so many snokers quit that they realized the remaining ones had much less elastic demands.