The elasticity of demand for alcoholic beverages is basically inelastic and when

Question

The elasticity of demand for alcoholic beverages is basically inelastic and when the government (State of Federal) increases taxes, the government tax revenue increases. And in the short run this was true with cigarettes as it is difficult for those who are addicted to change behavior in the short run. Taxes on alcoholic beverages and cigarettes are "sin" taxes. See what can be found about the elasticity of demand for such products as soft drinks-Coke, Pepsi- and how much does the price have to be raised to make a significant impact on consumption. Please discuss in your own words briefly.

Explanation / Answer

Demand for those commodities which have substitutes (for example, Coke and Pepsi, Orange juice and Lime juice, Tea and Coffee, Mountain Dew and Sprite etc.) are relatively more elastic.

The reason being that when the price of a good (say Coke) rises, the demand for Coke falls and the demand for its substitute good (say pepsi) rises at the given price and as a result the demand curve of the good (pepsi) shifts to the right which implies an increase in demand.

Commodities having no substitutes like liquor, cigarettes, etc. have inelastic demand. Further, the person who is accustomed or habitual to liquor, cigarettes etc. will buy these goods for consumption at any cost because he can not live without them. Thus, the demand for these commodities ( liquor, cigarettes etc.) is not affected by increase or decrease in their prices.

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