Factors Affecting Price Elasticity of Demand

This article discusses the factors that affect the price elasticity of demand, including the nature of the product, presence of close substitutes, range of uses, level of income, and more. It also explores the potential impact of President Trump's protectionism move on Australia, particularly in terms of immigration, military affairs, and tariffs and quotas.

Running Head: PRICE AND DEMAND
FACTORS AFFECTING PRICE ELASTICITY OF DEMAND
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Price elasticity of demand (PED) refers to a measure that shows the receptiveness of the
amount of a good that is necessitated to the change in the price of the same commodity when
nothing but the price changes. Precisely it is the percentage change in the quantity of a product
necessitated as a result of a change in its price. There are different types of elasticity of demand
as shown below:
Perfectly elastic demand
This is whereby a trivial adjustment in price leads to a huge adjustment in the ultimatum.
In this case, a minor increase leads to a reduction in demand to zero whereas a small reduction in
price upsurges the demand to infinity.
(Seetaram & Forsyth, 2016).
From the above diagram, at price P, the demand for this commodity is infinite. However,
any rise in price will reduce the demand to zero.

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Perfectly inelastic demand
This is whereby any change in price does not affect the quantity of a commodity
demanded. The arithmetical worth for a perfectly inelastic demand is zero (ep=0).
(Seetaram & Forsyth, 2016).
The following discussion shows the factors that affect the price pliability of ultimatum.
Relatively elastic demand
This refers to a demand whereby the equivalent adjustment in ultimatum is larger than the
equivalent adjustment in the rate of a commodity. The elasticity here ranges from 1 to infinity
(ep>1)

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(Seetaram & Forsyth, 2016).
Relatively inelastic demand
This is whereby the proportionate alteration in demand is less than the proportionate
variation in price. If the price of product fluctuates by say 20%, then the ultimatum can adjust by
10%, and hence the demand is said to be relatively inelastic.
(Seetaram & Forsyth, 2016).
From the above diagram, it can be seen that the adjustment from OQ1 TO OQ2 is slighter than
the adjustment from OP1 to Op2.
Unitary elastic demand
This is whereby a change in the quantity demanded of commodity results to a
proportionate change in the price of the commodity. Here, the elasticity value is equal to a unit,
i.e. (ep=1).

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(Seetaram & Forsyth, 2016).
Here, change from OP1 to OP2 is the same as the change from OQ1 to OQ2. The demand
is, therefore, said to have a unitary elasticity.
The following a factors discussion will now show the factors that affect the price elasticity of a
commodity.
Nature of the product
The elasticity of demand for a given product is dependent on the nature of the product,
i.e. whether the product is a luxury good or a necessary good. The elasticity of a good classified
as necessary good is always small. If the price of such good goes up, then the buyers are not in a
position to reduce the demand for such kind of good (Leamer & Stern, 2017). In another case, if
the price of a necessary good does down, the buyers are not able to increase their purchase of the
particular commodity because the commodity is a necessity and that the consumers had been
purchasing the required quantities at the prevailing prices.
A good example is for the case of rice which is a very necessary commodity for US
(Peter, 2017). The quantity of rice demanded cannot go down because its price in the market has
gone up but people will just consume the quantity that they were consuming before an increase
in the price. Therefore, the more a good is necessary for us, the lesser the price elasticity of
demand for the good.

PRICE AND DEMAND 6
However, the elasticity of demand for a luxury good is in most cases high. The latter is
because the utilization of the luxury good can be deferred and therefore if the price of such a
commodity increase, then the demand for the good is considerably reduced (Karlan & Zinman,
2018). If the price of the luxury good reduces, then the demand for luxury good increases
because along with the new demand all deferred demands would be fully satisfied. Therefore, it
is evident that the demand for luxury goods is said to be relatively elastic.
Presence of close substitutes
If there is a close substitute for a given good, then the demand for such kind of good will
be more elastic. For instance, if tea which is a close substitute to coffee is easily available in the
market, any given rise I the price of coffee in the market will lead to a considerable fall in
demand for coffee and the demand for ta will rise consequently (Pigou, 2016). Demand for
coffee is therefore said to be more elastic due to the availability of its close substitute. In a case
whereby the price of coffee goes down, individuals will tend to reduce their consumption of tea
and end up consuming more quantities of coffee and hence the demand for coffee would be more
elastic because of its availability in the market vis a vis.
In another occasion, since egg and meat are readily available in the market and are close
substitutes for another commodity say fish, demand for fish then is more elastic (Labandeira ,
Labeaga , & López-Otero, 2017). The latter is a clear indication that if there are more substitutes,
then the price elasticity for a given commodity will be increasingly good.
The range of uses of a good
The more the number of uses that good has, the more the elasticity of demand for the
same good. A good example is for the case of electricity which has several uses. For instance,

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electricity can be used for lighting, cooking and it is also used as a provider of energy for firms
(Foster , Haltiwanger , & Syverson, 2016). When the price for electricity goes up, its demand
goes up in every other use and hence, in the totality there will be an increase in demand and
hence giving a high price elasticity of demand.
The share of the income which is spent on a product
Price elasticity of demand for a given good is depended on the proportion of income that
is spent on the particular commodity. Given that the buyers spend little income to purchase a
certain commodity, the buyers will hence decrease the consumption this particular good as the
price for the product goes up. Due to the fact that the buyers utilize a small fraction of their
income on buying this particular well, they purchase the good with respect to their requirement at
any given price and therefore, when the buyers spend little of their income on a certain good, the
price elasticity of demand for the particular good would be relatively small (Litman, 2016). If the
same consumers spend a large amount of their income on purchasing the commodity, then the
price elasticity of demand for this good will be relatively high. The price elasticity of demand is
generally said to be dependent on the share of the income that is utilized in a certain commodity.
Level of prices
The demand for products that have high prices is highly elastic. The goods that have low
prices, on the other hand, are said to have an inelastic demand. The goods that have high prices
are in most cases luxurious goods while the goods that have low prices are the necessary goods.
The luxury goods are purchased by those people who have a high income (Peng , Song , Crouch ,
& Witt, 2015). For instance, given that the price of a color television set falls from $2400 to
$1400, then the price favors the people who were not able to purchase this commodity before.

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The consumers will, therefore, rush to the market to purchase the color TV. Therefore, when the
price of the TV goes up or down, the amount demanded of the TV goes up or down remarkably.
On the other hand, given that the price of salt rises from $2 to $5, there will be no much
remarkable fall in the quantity which is demanded of this quantity.
Habits of human beings
Any continuous use of a given commodity will form a habit. Habits cannot be avoided. If
one has developed and habit, then they will not be able to abstain from using the commodity
even in a case whereby the price of the commodity goes up. The consumer needs to satisfy the
want regardless of the price of the commodity. A good example is for the case of cigarette
whereby the consumer will consume cigar regardless of the price being charged. As a result of
the latter, the demand for such good is said to be fairly inelastic.
The lifespan of the commodity in question
Durable commodities have an elastic demand whereas the demand for the commodities
which are less durable is inelastic. The utility of a durable good goes on diminishing over time.
When a buyer purchases a durable good, he feels that he does not want the good for a longer
period. Therefore, the increase or decrease in price has no power to influence the demand for a
commodity (Seetaram & Forsyth, 2016). The demand is therefore said to be elastic. The less
durable goods, on the other hand, are used repeatedly. Any change in price influences demand,
and thus the demand for a perishable good is less elastic.
Level of income
The elasticity of demand is dependent on the level of income. The haves and have are not
equally affected by the changes in price. The poor are severely affected by the changes in price

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than the rich people. Since the rich people have a high income, they will buy the same amount of
a commodity even with an increase in the price of the commodity (Janine , 2017). For instance,
with an increase in the price of a good like Horlicks, the consumer will end up purchasing milk
powder which is relatively cheaper than the Horlicks. Therefore, Horlicks have an inelastic
demand for rich people while for the poor people it has an elastic demand.
Question 2
President Trump’s protectionism move will have benefits in the short run but might cause
a disaster in the long run for the people of Australia. As far as American politics is concerned,
the Australians are supposed to be very much concerned since at long run this will have several
repercussions to the people of Australia.
Immigration
The Australian government has been facing serious challenges which relate to refugee
immigration.as a result of this, the country and the entire world needs to have a compassionate
leadership which will be able to handle the humanitarian problem. On the other hand, America
through President Donald Trump’s leadership has vowed to stop illegal immigrants by
constructing a wall on the American border with Mexico. The decision is a clear interpretation of
his goal to see that the US becomes more insular and hence judge the immigrants from both
culture and religion.
The move could likewise matter to the Australian government since Australia gets pride
in the peaceful coexistence and multiculturalism that it holds. The latter is threatened by the

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movements like ‘reclaim Australia’ the move made by the US president might make the aims of
Australia movement encouraged.
Military affairs
The USA is a longtime ally to Australia. The two nations have had a history of foreign
policy collaboration which includes a joint military engagement. However, they are facing
challenges in policies that need a delicate leadership, a move which Trump does not encourage.
There is a dispute between the people in southern China and the Philippines concerning the
ownership of the territorial waters. Trump made statements that are provocative concerning
china’s mission to build a military island in the middle of the South China Sea. Trump said that
he would reduce the military in the area but from another perspective, the move will increase
Chinas rivalry with the USA.
The destabilization of China's south sea route will have a direct impact on the people of
Australia. The place is a major shipping route for the people of Australia for many Australian
businesses and also the largest two-way trading partner between Australia and China. The other
policy challenge facing the USA and Australia is the fight against the Islamic State in the Middle
East and whereby Australia is a key player. Australia finds itself in problems because of
following the footsteps of US since it finally finds itself in war grants. The preferences made by
Trump could make Australia dragged in another war.
Tariffs and quotas
The introduction of high tariffs is one of the strategies which trump want to employ to
make USA great again. The president intention to withdraw from NAFTA and Transpacific

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partnership will be devastating. This will be favorable to the USA in the short run but
disadvantageous in the long run. When we consider the USA China tariff isolation, it is evident
that the tariffs will not be helpful to the manufacturing industry in the USA and they will not
have major impacts on other countries apart from USA and China. The USA will minimize
competition from China imports and encourage imports from other countries. The USA will also
export little of its manufacturing output. The tariffs between China and USA will pose
challenges in Australia since the two countries are Australia’s biggest trading partners.

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References
Foster , L., Haltiwanger , J., & Syverson, C. (2016). The slow growth of new plants: Learning
about demand? Economica, 83(5), 176-204.
Janine , D. (2017). TTPI;What Has Australia to Fear from Trump Protectionism. Retrieved May
19th, 2017, from http://www.austaxpolicy.com/australia-fear-trump-protectionism/
Karlan , D., & Zinman, J. (2018). Price and control elasticities of demand for savings. Journal of
Development Economics, 45(4), 145-176.
Labandeira , X., Labeaga , J. M., & López-Otero, X. (2017). A meta-analysis on the price
elasticity of energy demand. Energy Policy, 102(1), 549-568.
Leamer , E. E., & Stern, R. M. (2017). Quantitative international economics. Routledge.
Litman, T. (2016). Understanding transport demands and elasticities. Routledge.
Peng , B., Song , H., Crouch , G. I., & Witt, S. F. (2015). A meta-analysis of international
tourism demand elasticities. Journal of Travel Research, 54(5), 211-233.
Peter, H. (2017). United Fates. Sydney Horning Herald, 10(3), 45-67.
Pigou, A. C. (2016). Industrial fluctuations. Routledge.
Seetaram , N., & Forsyth, P. (2016). Measuring price elasticities of demand for outbound tourism
using competitiveness indices. Annals of Tourism Research, 56(4), 79-123.