Price Elasticity Of Demand: An Economic Essay.

Provide an economic analysis of the problems facing the wine grape growing agricultural industry in Australia. 

Perfectly Elastic Demand

Price elasticity of demand is the degree that is used in money matters to describe the degree of awareness of the quantity necessitated or service to a adjustment in the price when only the price changes. In other words, it is the proportionate change in the quantity demanded in response to a unit change in the price. There are different types of price elasticity of demand as discussed below.

Demand is said to be perfectly inelastic in a situation whereby the quantity demanded is increasing infinitely When there is a fall in the price or the quantity demanded goes down to zero with a slight increase in the quantity demanded (Coglianese , Davis , & Kilian, 2017). This is also known as infinite elasticity. This elasticity does not have much importance in life since it is not commonly found in a real-life situation.

In the above diagram, the prices and quantity follow the x and y-axis. Here the demand curve is horizontal and it demonstrates that any adjustment in price leads to a fall or rise in the amount necessitated.

This is whereby demand remains unchanged even if the price changes. It is mostly referred to as zero elasticity (Colchero , Salgado , & Unar-Munguia, 2015). This elasticity is also not of practical importance since it is not commonly found in a real-life situation.

Here, the demand curve is a vertical straight line. It is a clear indication that demand remains constant with the change in price.

This is whereby the proportionate change in ultimatum is greater than the proportionate adjustment in price. For instance, given that there is a 5% fall in prices and that demand increases by more than 5%, then this is a relatively elastic demand.

From the diagram above, the demand curve appears flat showing that demand is elastic. Any small fall in the price will lead to an upsurge in ultimatum. In the same manner, a reduction in rates will lead to a lessening in ultimatum.   

This occurs if the proportionate alteration in the amount that is wanted is less than the fractionate variation in price. If for example, price falls by 10%, then demand rises by 5% then this is called a relatively inelastic demand curve.

In the above diagram, the demand curve appears steeper hence an indication of less elastic demand. The greater fall in price as shown will lead to an increase in demand.

Perfectly Inelastic Demand Curve

Ultimatum is said to be unitary pliable if the equivalent adjustment in price is equal to the proportionate adjustment in the amount that is needed. This kind of demand is imaginary because it is rarely applied in real life situation

In the above diagram, the ultimatum arc is a quadrilateral hyperbola. The latter means that ultimatum is unitary elastic. The decrease in price has led to an equal increase in demand.

The price pliability of a commodity relies on the nature of the commodity, i.e. if the good in question is a necessary good or a frill good. There is a small elasticity of demand for a necessary good (Labandeira , Labeaga , & López-Otero, 2017). If the price of such good goes up, then the buyers are not able to lower their demand. If the prices of such goods go down, the demand will not go up since the good is a necessity.

A perfect example is for the case of rice which is necessary for most people. The demand for rice cannot be brought down when the prices go up. On the other hand, when there is a fall in price, the demand does not increase since the good is a necessity for us. However, the elasticity for a luxury good is high (Torriti, 2016). The latter comes about because the consumption of a luxury commodity can be deferred. This explains the reason as to why there is a decline in the amount of good consumed when there is an increase in price. If there is a reduction in the worth of a luxury good, the ultimatum for the commodity will go up since the deferred good will be fully satisfied. Ultimatum for a luxury good is hence said to be more elastic.

The ultimatum for a particular commodity will be more elastic if the good has very close substitutes. For instance, tea is a close substitute for coffee. If both of these products are available in the market an upsurge in the rates of coffee will cause a reduction in its ultimatum and this will cause an increase in the ultimatum for tea (Miller & Alberini, 2016). The demand for coffee is therefore said to be comparatively more elastic as a result of the obtainability of tea. Given the price of coffee goes down, people will decrease their consumption of tea, and this will lead to an increase in the demand for coffee. The demand of coffee is therefore said to be more elastic as a result of the availability of tea. In a case where there is a decrease in the price of coffee, there will be a reduction in the consumption of coffee. The demand for coffee is therefore said to be more elastic since there is a close substitute.

Relatively Elastic Demand

If there is more of the variety of uses for a given product, then the product is said to have more elastic demand. A perfect example of such good is electricity. Electricity has a variety of uses which include; lighting, cooking, heating, and ironing among others (Kanjilal & Ghosh, 2017). This explains the reason as to why when there is a decrease in electricity, the demand goes up in every use. The demand is therefore expected to increase and hence give a coefficient of high elasticity of demand.

Price elasticity of demand for a particular good is also dependent on the amount of income which is spent on that particular commodity. In a case whereby the buyers spent a small amount of income for this particular product, then the buyers will not decrease the purchase of this commodity even if the price of the good goes up (Pigou, 2016). Since the buyers utilize small proportion of their income in purchasing this good, they will purchase the good according to their requirement. This makes the consumers not to increase their purchase even when the price goes down. The price elasticity of demand, in this case, would be relatively small if the buyers spent a small fraction of their income on a particular product. In a case whereby a large proportion is used, then the price elasticity of demand will be very high.

Habits act as a determinant of the elasticity of demand for a particular good. People may consider surrendering to the consumption of goods that cause addiction (Nagle & Müller, 2017). Such goods include alcohol and tobacco products. In the case whereby the price of these commodities go up, their demand does not decrease, and hence the elasticity of their demand is relatively small.

A commodity can have a high elasticity of demand in a case whereby the consumers can defer the purchase or the utilization of the commodity. If then the price of this commodity goes up, then the purchase will be deferred, and hence the demand for the commodity will reduce (Haberler , 2017). If there is a fall in the price of the commodity, then the deferred demand will reappear in the market. Perfect examples of this include building materials like iron rods and cement.

The price elasticity for a given commodity also depends on the price. The quantity demanded a commodity changes with the change in price, and this owes to the law of demand. The elasticity of a commodity goes hand in hand with the demand: the smaller the price, the lesser the price elasticity of demand (Coglianese , Davis , & Kilian, 2017). Therefore, when the price of a commodity is small, there will be no effect t in the overall demand when the price changes. If the price of a commodity is large, then the elasticity of demand would be more. This is because when the prices are high, any further increase in price will lead to a diminishing effect on the demand and any decrease in price will lead to a very encouraging effect on the demand for this particular commodity.

Relatively Inelastic Demand

Protectionism is one of president trumps strategy in his plans to make America great again. The president has been on cold war with trade agreements, and he formally withdrew from the Transpacific partnership and also threatened that talks were ongoing on whether to withdraw from NAFTA (Godsell , Lel , & Miller, 2017). In a case where he gets away with this, then protectionism in the USA would be a perfect replica of the protectionism that occurred in the post-war times. There is no coincidence that in the 1970s, tariffs in Australia had gone up to high levels and the computable equilibrium was beginning to take place in Australia. The ORANI model was used in the quantification of the gains of cutting tariffs. Increased tariffs meant high costs, and this was deadly to the people who were exporting goods (Godsell , Lel , & Miller, 2017). Through the latter, Australia lost much of its income from the manufacturing sector. However, the country started exporting mining and agricultural products and the indication form the ORANI model was that there were gains. The latter would not be as smooth if the same were applied in the United States of America. The US is reported to have imposed a 45% tariff on commodities that come from China.

The ORANI model has effects on the growth and development of most economic models which includes the GTAP model, UNICTAD and World Bank. By use of GTAP, we can look at the impact of the imposition of tariffs on Chinese imports to the US (Xiong & Beghin, 2016). The two messages depicted from the imposition of these taxes and these are that the tariffs will not be of much help to the US manufacturing sector in the long run and the second message is that other countries will not be impacted apart from China and USA.

The tariffs will promote the local industries through the removal of imports. However, the high tariffs in China will not lead to the creation of a revival in the manufacturing sector of USA. The USA will increase imports from the other countries instead and reduce its manufactured exports. The service would be greater due to the slight expansion in the economy.

There will also be adverse effects on other countries like Australia. The imposition of these tariffs in China will damage Australia’s largest trading partners, and this will lead to a reduction of income in China (Buongiorno & Johnston, 2018). Despite the latter, there are mixed effects on the Australian market.

Unitary Elastic Demand

While the USA economy grows smaller, the Australian exporters will also be affected. The USA will reduce imports from China and consequently import more from other countries which include Australia (Nagle & Müller, 2017). The USA will also reduce its products exported, and this will lead to the creation of a chance for Australia to increase its exports.

The economy of China will also be reduced, and this will not be favorable to Australia. However, Australians will have access to cheaper products from China, and this will improve the purchasing power on the people of Australia. The rest of the world will be better off, and this will also be favorable to Australia. The impact of the new tariffs imposed on China by the USA will possess little impact on Australia (Pigou, 2016). There would be some shifting noted at the sectoral level. The agricultural sector would be smaller, and the other manufacturing sectors would become large. The USA tariffs on Chinese imports will not lead to widespread harm. However, if they turn to this, then the world economy would be in for a rough idea indeed.

Conclusion

As discussed above, price elasticity is a measure of the degree of responsiveness of quantity demanded to a change in its price. There exist different types of price elasticity of demand. Different factors have been noted to determine the price elasticity of demand. The factors include the habits, the fractions of income spent on a product, the price of a commodity and the variety of products that exist in a market. The discussion of the effects of USA protectionism policies has shown that Australia should not be Afraid of the protectionism policies since the country will not be affected considerably by the protectionist measures.

References

Buongiorno , J., & Johnston, C. (2018). Potential Effects of US Protectionism. Journal of Economics, 56(5), 56-89.

Coglianese , J., Davis , L. W., & Kilian, L. (2017). Anticipation, tax avoidance, and the price elasticity of gasoline demand. Journal of Applied Econometrics, 15(1), 1-15.

Colchero , M. A., Salgado , J. C., & Unar-Munguia, M. (2015). Price elasticity of the demand for sugar sweetened beverages and soft drinks in Mexico. Economics, 19(4), 193-197.

Godsell , D., Lel , U., & Miller, D. (2017). Financial protectionism, takeover activity, and shareholder wealth. Oxford: Oxford University Press.

Haberler , G. (2017). Prosperity and depression: A theoretical analysis of cyclical movements. Routledge.

Kanjilal , K., & Ghosh, S. (2017). Revisiting income and price elasticity of gasoline demand in India: new evidence from cointegration tests. Empirical Economics, 1(1), 1-26.

Labandeira , X., Labeaga , J. M., & López-Otero, X. (2017). A meta-analysis on the price elasticity of energy demand. Energy Policy, 13(2), 156-198.

Miller , M., & Alberini, A. (2016). Sensitivity of price elasticity of demand to aggregation, unobserved heterogeneity, price trends, and price endogeneity. Energy Policy, 45(6), 243-257.

Nagle , T. T., & Müller, G. (2017). The strategy and tactics of pricing: A guide to growing more profitably. Routledge.

Pigou, A. C. (2016). Industrial fluctuations. Routledge.

Torriti, J. (2016). Peak demand, price elasticity and intrinsic flexibility from time use activities. Routledge.

Xiong , B., & Beghin, J. C. (2016). Stringent maximum residue limits, protectionism, and competitiveness: The cases of the us and canada. In Nontariff Measures and International Trade, 19(4), 189-203.