Price Elasticity and Protectionism

This article discusses the different types of price elasticity of demand and the factors that determine it. It also explores the effects of protectionism policies on Australia and its economy. The article provides insights into the ORANI model and its impact on economic models like GTAP, UNICTAD, and World Bank.

Running Head: PRICE ELASTICITY OF DEMAND
PRICE ELASTICITY AND PROTECTIONISM
Name
Professor
Institution
Course
Date

PRICE ELASTICITY OF DEMAND 2
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.
Perfectly Elastic Demand
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.
(Coglianese , Davis , & Kilian, 2017).

PRICE ELASTICITY OF DEMAND 3
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.
The Perfectly Inelastic Demand Curve
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.
(Colchero , Salgado , & Unar-
Munguia, 2015).
Here, the demand curve is a vertical straight line. It is a clear indication that demand
remains constant with the change in price.

PRICE ELASTICITY OF DEMAND 4
Relatively Elastic Demand
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.
(Coglianese , Davis , & Kilian,
2017).
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.

PRICE ELASTICITY OF DEMAND 5
Relatively Inelastic Demand
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.
(Colchero , Salgado , &
Unar-Munguia, 2015).
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.
Unitary Elastic Demand
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.

PRICE ELASTICITY OF DEMAND 6
(Colchero , Salgado , &
Unar-Munguia, 2015).
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.
There are several; factors that determine the price elasticity of demand as illustrated below;
Nature of the Good
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.

PRICE ELASTICITY OF DEMAND 7
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.
Availability of Close Substitutes
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.

PRICE ELASTICITY OF DEMAND 8
Variety of Products Existing In the Market
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.
The Fraction Of The Income That Is Spent On Food
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
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

PRICE ELASTICITY OF DEMAND 9
commodities go up, their demand does not decrease, and hence the elasticity of their demand is
relatively small.
Ease of Deferment of Consumption
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.
Price of the Commodity
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.

PRICE ELASTICITY OF DEMAND 10
Question two
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.

PRICE ELASTICITY OF DEMAND 11
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.
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.

PRICE ELASTICITY OF DEMAND 12
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.

PRICE ELASTICITY OF DEMAND 13
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.

PRICE ELASTICITY OF DEMAND 14
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.