1. Price elasticity of demand generally refers to an economic measure which indicates the extent to which the demand for a given commodity reacts to an alteration of the commodity’s price (Anderson et al, 2012).
Factors determining price elasticity of demand
The price elasticity of demand is determined by various factors which include:
The price elasticity of demand of a given commodity is determined by its nature. A person may view a given commodity as either luxurious, a comfort or a necessity (Kemp, 2010). Generally the demand for a luxurious commodity is more elastic than that of the necessities and comforts. For example, a car is viewed as a luxury by many people. People have the alternative of using public transport. If the price of cars rises, this may lead to a drastic change in their demand as people boycott purchasing them to use public transport. If a commodity is viewed as a comfort by the consumer for example a refrigerator, its demand is elastic. If the prices for such commodities rise, then consumers may decide to postpone their consumption to sometime in future. If a commodity is viewed as a necessity by the consumer, then its demand is obvious inelastic. An example is foods like vegetables and medicine. Necessities are generally required for consumers to survive and no matter how much their prices change consumers must at long last purchase them for their survival hence the change in prices for necessities has a little impact on their demand. The demand curve for necessities is steeper whilst that of luxuries tends to be more flat. The curves are shown below:
The price elasticity of demand is determined by the availability and the number of close substitutes. The demand for a product which has many close substitutes in the market is more elastic. If the price for such a good changes, consumers easily shift to purchasing the close substitutes (Loderer, Cooney & Van Drunen, 2014). For example Pepsi and Coke are close substitutes. This means that any attempt to increase the price of Pepsi will definitely shift many consumers to purchasing Coke. On the other hand, the demand for commodities with a few or no close substitutes in the market at all is less elastic. This means that a change in prices of such commodities may have a little or no effect at all on its demand. For example, commodities like salt and wheat have no close substitutes. A change in price for these commodities may not therefore affect their demand since consumers have no other options in the market.
The level of income by consumers highly affects price elasticity of demand. Consumers can be categorized into three based on their level of income namely high, middle and lower class (Lancaster, 2013). Consumers with higher levels of income have an inelastic demand. This is due to the fact that wealth people do not consider price of commodities that much as money is adequate for all their needs. Middle consumers with medium level of income have elastic demand as they can postpone their consumption to sometimes in future. Consumers with lower level of income have more elastic demand as the price increase of commodities of interest makes them unaffordable. This means that such consumers end up not purchasing the commodities at the higher prices as they have little or no money at all to spend.
Seasonality in consumption brings about the issue of peak and off-peak periods. Peak period occurs when the time for high consumption of a given commodity comes. Generally for those commodities which undergo seasonality in their consumption, their demand will be inelastic during the peak periods and more elastic during the off-peak periods. For example, considering products like umbrellas and gum boots, their consumption is always high during the rainy season. Much of their need is felt during the rainy season and consumers tend to purchase them more irrespective of their price of their price changes. During the rainy period the demand for these commodities will therefore be inelastic. During the summer period, the demand for these commodities becomes more elastic as they are not highly needed. This is the off-peak period and any price increase change may drastically reduce the demand for these commodities as consumers may opt to survive without them. The demand curve during the peak period is steeper while that of the off-peak period is a bit flat as shown below:
The price elasticity of demand is highly influenced by the proportion of income allocated towards consumption of a given commodity by the consumer (Bijmolt, Heerde & Pieters, 2010). Commodities which are allocated more money in consumers’ budget take high percentage of their income. As a result the demand for these commodities becomes more elastic. Some commodities on the other hand may take a small proportion of the consumer’s level of income budgeted for expenditure. The demand for these commodities is less elastic. For example, some commodities like match box, needle and salt take a small percentage of consumers’ budget and as a result there demand is less elastic. Some other commodities like rice, flour and cooking oil take huge percentage of consumers’ budgeted income. The demand for these commodities is more elastic.
Some commodities become habitual for consumers. They become used to consuming them whether they like it or not. This may be termed as addiction to those commodities and as a result they become necessities. This means that consumers can’t do without them and any stoppage of their use requires time. The demand for such commodities becomes less elastic as consumers must purchase them irrespective of their price change in order to satisfy their needs. A good example of these commodities is cigarettes, alcohol and tobacco. In many countries the prices of these commodities have been increased in order to discourage their consumption. Despite the price increase, consumers continue consuming them. This is an indication that most of consumers of these commodities have been addicted to using them and even if their prices are increased they will still consume them. The demand for habitual commodities is therefore less elastic.
In a nutshell, the price elasticity of demand of a given commodity is influenced by various factors. The factors which influence the price elasticity of demand of a given commodity depend on the market conditions at a given period of time.
Australia is among the richest nations in the Asia-Pacific region. It has been doing well in terms of economic currently having an economic growth rate of 2.5 percent which is measured in terms of the growth of the gross domestic product (Bryan & Rafferty, 2011). It has been ranked position 4 out of the 43 nations in the Asia-Pacific region. Australia also embraces a free economy where almost all its industries are open to competition. According to the 2018 index, Australia has been ranked position 5 in terms of economic freedom with a score of 80.9. The overall economic performance of Australia is above the expected averages both at the region and world levels.
Australia embraces international trade and participates much in the export market. It usually exports goods and services for which it has comparative advantage in producing. These commodities are mainly agricultural products and minerals (Krause, 2014). They include gold, iron ore, petroleum gases, wheat, fruits, sheep and goat meat, meslin and bovine among others. The total exports for Australia exceed $200 billion. Its main exporters include China with 31.6 percent, Japan 13.9 percent, European Union 7.5 percent, South Korea 6.7 percent, United States 4.6 percent and others occupy 35.6 percent.
President Donald Trump’s protectionist policies will highly benefit Australia. The protectionist policies implemented by President Donald Trump brought about trade war between many nations the major ones being China and the European Union. The protectionist policies are mainly in form of tariffs on certain targeted products from certain targeted nations. Australia majorly benefits from the trade war between the two world biggest economies of the United States and China.
President Donald Trump imposed tariffs on Chinese and other nations such as European Region and Canada steel and aluminum of 25 percent and 10 percent respectively on May 2018. Trump also imposed tariffs on Chinese cutting edge goods of more than $70 billion. Trump imposed tariffs on the Chinese products claiming that Beijing heavily subsidized the production of Chinese products such as Steel and Aluminum and this threatened the United States domestic industries as these products were as if they were being dumped in United States (Shirk, 2017). Australia was not targeted on the steel and aluminum tariffs. This is due to the fact the United States has a surplus in terms of trade with Australia and may not target it anytime soon as most of its exports to the United States are protected by the Free Trade Agreement between these two nations. China highly imports coal to produce steel. Most of the imported coal comes from the United States. Due to the trade war between these two nations, Australia has benefited much by exporting much of its coal to China. It has also benefited much by exporting much of its steel to the United States. This has led to improvement of the export sector of Australia.
Due to President Donald Trump’s imposed tariffs on the Chinese steel and aluminum, China retaliated and imposed 25 percent tariffs on 128 agricultural products from the United States. Some of these agricultural products include meat, fruits, soybeans and wines. As a result of these tariffs, the Australian agricultural sector improved and has been improving in terms of export performance (Brewewer, 2017). The imposed tariffs have led to a decline in the United States wine exports to China. On the other hand, the Australian wine exports to China have improved to 63 percent to $848 billion. According to the CNBC, Australia topped the wine exports in the year 2017 as a result of the retaliatory China’s tariffs of the United States agricultural products.
Australia is a stronger competitor to the United States in terms of agricultural products in the export market. This is due to the fact that it has improved agricultural research and development capabilities. Its agricultural systems of production are supported by its agronomy capabilities and its agricultural science which is of a world-class level. Due to this, Australia competes much with the United States in exporting fruits to China. Due to the imposed tariffs on the United States agricultural products by China, the United States fruit exports to China decline while those of Australia and Chile improved. By the end of 2017, more than 40 percent of the Australian fruit exports were sold to China (Schandl & West, 2016). This shows that further trade war between China and the United States will highly benefit Australia.
The Australian tree nut exports have also increased from the Trump’s protectionist policies and the same trend is expected if the trade war is maintained. The Australian tree nut exports have been increasing from the year 2011 to 2016. Estimates from the Australian Bureau of Statistics show that the tree nuts exports especially to China have increased from $6 million to $63 million from the year 2011 to 2016 respectively. With the Trump’s protectionist policies, the Australian bureau of statistics has predicted a further increase in the tree nuts exports especially to China to increase to $1 billion.
The retaliatory Chinese tariffs on the United States products have led to a decline in the scrap aluminum which was being imported by China and melted in its furnaces to make aluminum. This has seen the exports of waste materials from Australia to China increase. China is the biggest trader of waste materials for Australia. According to the Australian Bureau of Statistics, waste materials trade between Australia and China accounts for more than $602 million which is more than 31 percent of Australian waste materials (Kelly, 2014). This therefore indicates that with the Trump protectionist policies, Australia stands a chance to expand its waste materials exports not only to China but also to other nations such as the Europe Union and Canada.
Conclusion
In a nutshell, Australia stands a chance to benefit much from the Trump’s protectionist policies. Much of the benefits have of the benefits have already been noted as Australia has been benefiting much from the trade war between the United States and China. The Australian agricultural sector has improved much from the Chinese retaliatory tariffs on the United States agricultural products. It has increased many of its agricultural exports to china such as fruits and wine. Its waste material and coal exports have also increased. To sum up, Australia stands to benefit from Trump’s protectionist policies.
References
Anderson, P. L., McLellan, R. D., Overton, J. P., & Wolfram, G. L. (2012). Price elasticity of demand. McKinac Center for Public Policy. Accessed October, 13, 2010.
Bijmolt, T. H., Heerde, H. J. V., & Pieters, R. G. (2010). New empirical generalizations on the determinants of price elasticity. Journal of marketing research, 42(2), 141-156.
Brewewer, P. (2017). Psychic distance and Australian export market selection. Australian Journal of Management, 32(1), 73-94.
Bryan, D., & Rafferty, M. (2011). The Global Economy in Australia: Global integration and national economic policy. Allen & Unwin.
Lancaster, K. J. (2013). A new approach to consumer theory. Journal of political economy, 74(2), 132-157.
Loderer, C., Cooney, J. W., & Van Drunen, L. D. (2014). The price elasticity of demand for common stock. The Journal of Finance, 46(2), 621-651.
Kelly, G. (2014). Chinese rebalancing and Australian exports. Reserve Bank of Australia Bulletin December Quarter, 2014, 23-29.
Kemp, S. (2010). Perceiving luxury and necessity. Journal of Economic Psychology, 19(5), 591- 606. Patrick, S. M. (2017). Trump and World Order: The Return of Self-Help. Foreign Aff., 96, 52.
Krause, L. B. (2014). Australia’s comparative advantage in international trade. The Australian Economy: A View from the North, 275-311.
Schandl, H., & West, J. (2016). Material flows and material productivity in China, Australia, and Japan. Journal of Industrial Ecology, 16(3), 352-364.
Shirk, S. (2017). Trump and China: Getting to Yes with Beijing. Foreign Aff., 96, 20.
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download