The Elasticity of Alcohol Demand – Practice Data Response Question
In 2010 the tax authorities in the UK carried out a survey of consumer spending on
alcohol in the UK (see Table 1). At this time the UK government generated £9 billion
from taxes on alcohol – around 2% of the government’s total revenue.
Table 1 The percentage of consumer spending on different types of alcohol in 2010.
Alcohol
Percentage of Consumer Spending
Beer
36%
Wine
32%
Spirits
29%
Cider
3%
Over the previous 30 years, sales of beer declined, spirits fluctuated at about the
same level and wine sales more than tripled.
The demand for alcohol is influenced by a greater variety of factors than most other
goods. In addition to factors such as price and income, the demand for alcohol is
influenced by licensing restrictions, age requirements, peer group pressure, social
factors, health conditions, location, sex, age, religion and marital status. As a result,
it can be difficult to isolate the impact of individual factors on demand.
A major factor in determining price elasticity of demand (PED) is whether alcohol
is bought in a licensed premises (such as a pub) or from a retailer (such as a
supermarket). The government’s calculations showed a few key results:



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The PED for alcohol tends to be inelastic.
The PED for beer is more inelastic than the PED for wine and spirits.
The PED for heavy drinkers in more inelastic than it is for light drinkers.
The PED was more elastic for retailers than licensed premises.
The latest figures show that wine and spirits have positive income elasticities of
demand (YED) and that beer has the lowest YED. Indeed it has been predicted that
beer will have negative YED in the next few years.
The government also calculated cross elasticities of demand (XED) between
different types of alcohol. Some example results are as follows:
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
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The XED between beer and wine bought at licenced premises was +0.54.
The XED between beer and wine bought from retailers was +0.03.
The XED between wine and cider bought from retailers was -0.90.
Table 2 PED and YED for alcohol in 2011
Beer (licensed premises)
Beer (retailers)
Wine (licensed premises)
Wine (retailers)
Spirits (licensed premises)
Spirits (retailers)
PED
-0.77
-1.11
-0.46
-0.54
-1.15
-0.90
YED
+0.31
+0.22
+0.90
+0.42
+0.55
+0.32
In 2012 UK alcohol consumption fell below 10 litres per head for the first time since
1999. This forms part of a downward trend from a peak of 11.6 litres per head in
2004.
1. Define the term price elasticity of demand. (3 marks)
2. If the cross elasticity of demand between wine and cider bought from retailers
is -0.90. Calculate the percentage change in demand for wine if the price of
cider fell by 10%. What is the relationship between these two products? (4
marks)
3. Using table 2, identify two significant points of comparison between alcohol
bought in licensed premises and that bought at retailers in terms of elasticity.
(4 marks)
4. The extract states that beer will have negative income elasticity of demand in
the future. Draw a supply and demand diagram showing the effects of a fall in
income on the price and quantity of beer in the future. (4 marks)
5. The extract states that ‘the demand alcohol in influenced by a greater variety
of factors than most other goods’. Explain two possible reasons, other than
change in price and income, for the fall in demand for alcohol since 2004. (10
marks)