Essay On Factors Affecting Price Elasticity Of Demand & Trump's Protectionist Policies' Impact On Australian Economy.

Assignment consists of two essay questions based on Text material. Before attempting this assignment you are expected to have read Text chapters 1, 2, 3 and 4. 

Answer the following questions ensuring that you apply economic principles or theory related to (a) the concepts of supply and demand for Question 1 and (b) the concepts of specialisation and exchange for Question 2 to inform your analysis and support your decisions. Communicate your ideas with correct grammar, spelling and writing style and support your answers with diagrams as necessary.

1. Identify and explain the factors that determine the price elasticity of demand and provide illustrative examples, based on media reports, of the impact of each factor on the demand for a good or service.

2. Will the Australian economy benefit from President Trump's protectionist policies? Provide illustrative examples from media reports to support your answer and ensure that you consider the concept of comparative advantage.

Factors affecting price elasticity of demand

1. The demand is considered to be elastic when there is a change in the demand of the product when the price of that product undergoes a change.

The products that have an elastic demand include the luxury goods, expensive and the big income groups, the products that are often purchased together and the goods that have many substitutes and face a competitive market (Economic online, 2018).

The following are few of the factors that affects the price elasticity of demand:

• The number of the closer substitutes: the more number of substitutes the product has, the greater is its price elasticity. This is due to the reason that the consumers find it easy to switch between the different substitutes. The example could include the air travel and the train travel which are considered to be the weak substitutes when it comes to the inter-continental flights but there are closer substitutes for the journeys which include the travel around 200 to 400kms.
• The cost of switching between the substitutes of the product: there could be costs involved when it comes to switching between the products. In such cases, where there are no costs involved, the demand is elastic and vice versa. In order to illustrate, the service providers of the mobile phones may sometimes insist on a 12 month contract which has the effect of locking in the customers once they have made the choice. So, when a customer goes for it, he cannot change the same within that span of 1 year.
• The degree of necessity: the goods that are necessary for the survival of the customer face an inelastic demand whereas the products that luxurious in nature would have an elastic demand. This is mainly due to the fact that the consumer would be able to afford the luxurious products only when all of its necessities have been duly fulfilled. In order to illustrate, the country of China produces about 97% of the total output of the rare earth metals which gives them a monopoly in the market.
• The proportion of the income of the consumer which he has allocated to the goods. The product that consumes a higher % of the total income which is being earned by the consumer is tend to be more elastic.
• The time which is allowed following the change in the price. The demand is more elastic when the consumers have a longer period of time to respond to such of the changes. They have more time to look for the substitutes or the alternatives and save on their spending.
• The demand for the product is inelastic when the consumers are buying them out of their sheer habit. In order to illustrate, cigarettes. The consumers that are addicted to these, would not mind spending a little more on their purchase (Economic help, 2018).
• Peak and off peak demand: the demand for the product is considered to be inelastic during the peak season whereas the same is elastic at the time of off peak season. This is mainly in the case of the transport services.
• The breadth of the definition of the goods or the services: in case, the product has been broadly defined, then the demand would be inelastic. But then it is also true that there are some of the brands of petrol or beef that have an elastic demand.

2. The President of the United States fulfilled his promise to save the US manufacturing jobs by the way of saving imposing 25% tariff on steel and 10% tariff on aluminium. This sparked retaliation from its key supporters.

There would be a shorter impact on the Australian businesses as along as the Australia is not being directly targeted. The fact still remains that the country of Australia is still exempted from the steel and the aluminium tariffs and the US still has the trade surplus with the country, Australia will not be targeted by the US. The majority of the goods being exported to the United States come under the purview of Australia-United States Free Trade agreement. Australia can also stand in between the trade war between China and United States (Blacher, 2018). In terms of the longer term impact, the policy of Trump on the Australian businesses is not certain. This entirely depends on the protectionism approach of Trump. In case, both of the parties cannot negotiate in terms of such restrictions, then it is quite likely that the economic growth of both of the countries would be affected and this in turn would slow down the growth of both the countries.

But is very much unlikely that the United States will burn all the ties that it has spent building in the past. The fact is that these tariffs just adds to the burnt and poses burden on the consumers since they eventually, end up paying for the same. The country is not able to protect the industries that it hoped for and this causes hardship on the consumers. Also, it is not likely that Trump would impose such restrictions since US has a very strong performing economy and if he imposes such tariffs, there would be a negative impact on the mid-term elections. Also, Deutsche Bank states that US has a trade surplus of an amount of $1.4 trillion in terms of both the direct trade and the sale of the multinational companies. This benefits from the globalization. It is due to these reasons it is not for sure that Trump would adopt his protectionism approach (Makin, 2018).

Impacts of Trump's protectionist policies on Australian economy

It is also evident that even in the future, if Trump decides to impose additional amount of the tariffs, then there would be a reduced impact on the country of Australia. This is so since policies like these would have an impact over the global trade policy of the country. This decision of the US President was based on the findings that the US Steel and the aluminium sector of the country had been underperforming which posed a threat to the national security. This decision represented the first direct protectionist action taken by the President when it comes to the overcapacity and the global dumping of the goods. This decision is expected to yield only short term benefits and as such no long term benefits. The country has faced a global retaliation from its allies. In response to this decision, the countries like Canada and Europe has threatened the country with the same level of measured extending on the US imports. But till the time the next North American Free Trade agreement takes place, Canada is free from such impositions.

The European commission has also stated that it would respond very strictly to these sanctions and there are others as well that would join. It has put forward a 25% tariff on €2.8 billion (USD$3.5 billion) worth of the US goods. Australia would not be involved in taking any action whatsoever to the WTO.

Trump has signalled that there are not much serious concerns as against the Australian businesses. The goods like beef, aircraft, parts etc. are all covered by the Australian-US Free Trade Agreement.

The current political environment brings in uncertainty but there are still many factors that affects these decisions. The intensity of the retaliatory response is something that should be watched upon wince Australia is on the verge of a trade break out. This is due to the fact that the country of Australia relies on china as being an export destination. There is a need of hour to create balance between the economic interests tied with china along with the standing military, political and the economic ties with the US which serves as a complicating factor in all of the future relations between both of these countries.

The main conclusion of this decision is the fact that this decision of US would have a little impact over the business of Australia. But there is a chance of a broader trade war which serves as an issue for the Australian businesses with the global operations that one should take account of. The Australian businesses must look for the opportunities to save costs through the way of global supply chains. And there is a soft response to the global challenges and the protectionist policies which are originating from the US. This holds good even when US’s trade policies is not affecting the Australian businesses directly, otherwise Australian would lose support from other countries in the world (PWC, 2018).

References:

Blacher, G. (2018). How will Australian business be affected by Trump’s protection. Retrieved from https://www.dynamicbusiness.com.au/news/how-will-australian-business-be-affected-by-trumps-protection.html

Price elasticity of demand. (2018). Retrieved from https://www.economicsonline.co.uk/Competitive_markets/Price_elasticity_of_demand.html

Price Elasticity of Demand (PED). (2018). Retrieved from https://www.economicshelp.org/microessays/equilibrium/price-elasticity-demand/

Trump’s Trade War: what does this mean for Australian Businesses?. (2018). Retrieved from https://www.pwc.com.au/tax/taxtalk/assets/alerts/trumps-trade-war-16mar18.pdf

Trump's tariffs will have little impact on Australia. (2018). Retrieved from https://www.abc.net.au/news/2018-03-09/donald-trump-tariffs-will-have-little-impact-on-australia/9532044