Price Elasticity of Demand

This article explains the concept of price elasticity of demand, its formula, and factors affecting it such as accessibility of surrogates, range of uses, share of wages consumed, complementarity amid goods, time elasticity, and possibility of postponement. It also explores the impact of protectionism on Australia's economy.

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

PRICE ELASTICITIES 2
Price elasticity of demand is a phrase that is used to refer to the economic measure of the
alteration in the quantity of product which is demanded or purchased in relation to the change in
its price. In mathematical terms; Price elasticity of demand = the percentage change in the
quantity demanded/the percentage change in the price. Price elasticity explains how changes
occur in either demand or supply given the changes in the prices. Some goods, for example, are
highly inelastic in that, their prices are almost rigid given the changes in the supply and demand.
People will, for instance, need to buy gasoline so that they can travel to work. If the price of
gasoline changes, then people will still demand the same amount of gasoline. Other goods are
highly elastic in that their changes in price causes a great change in demand and supply. Given
that the price elasticity of a quantity of a good demanded varies with the price change, then the
good is said to be elastic in that if price changes by say +5, then the demand fall by -10. Given
that the change in the amount necessitated is the same as the adjustment in price, then the
elasticity is said to be unitary. If the quantity purchased then changes less than the change in
price say the quantity of a good demanded changes by -5, then the price changes by +10, then the
good in question is said to be inelastic.

PRICE ELASTICITIES 3
Unitary Price Elasticity Is As Shown In the Diagram Below
(Pigou, 2016).

PRICE ELASTICITIES 4
(Pigou, 2016).
The following discussion shows the factors that affect the price pliability of demand and also its
effects
Accessibility of Surrogates
This is the most important factor that affects the elasticity of demand. Given that the
commodity in question has close substitutes, then demand is elastic. In the case whereby the
price of this commodity goes up, individuals will automatically shift to the close substitutes, and
this will lead to a decline in the measure of that product which increased its price (Coglianese &
Kilian, 2017). The possibility of the existence of a close substitute means that there will be an
increased elasticity of demand for the good. In a case whereby the good in question does not

PRICE ELASTICITIES 5
have a close substitute, then it means that people will have no alternative but to buy it even if the
price of this good goes up. The demand will, therefore, be said to be inelastic.
A good example is for the case of the demand for the coca cola which is elastic. The fact
that the substitutes are closely available makes the consumers highly sensitive to changes in the
price of coca cola products, and hence the demand for the good is said to be elastic. In another
instance, the demand for salt is inelastic since there are no close substitutes for the common salt
which are readily available (Nagle . & Müller, 2016).
Given that there is a slight increase in the price of common salt, people would then
consume the same quantity of this good just as they were consuming before because the good in
question does not have any close substitute (Miller & Alberini, 2016). The demand for salt
becomes inelastic since people do not spend much of their income on it and even if there is a rise
in prices, it will make a difference that is negligible to the budget that is allocated for salt.
The range of uses of the commodity
This is a significant element of the elasticity. The more the number of uses the
commodity can be put, the greater the price elastic of the demand. Given that a commodity in
question has several uses and its price has increased, the demand for this good will go down, and
it will be used on the situations which are not easily avoidable. If the price of this good falls, the
consumption will be allocated to the less important uses, and hence the quantity which is
demanded will go up significantly (Bel & Gradus, 2016). Milk is a good example that has a
variety of uses.in a situation whereby the prices rise to a very high level; the commodity will be
purchased only for the most important uses which include the administration to the sick people
and also to the little children. Given that the prices of milk go down, then the milk will be

PRICE ELASTICITIES 6
devoted to the other uses like in the preparation of ghee and sweets. The demand for milk,
therefore, tends to be elastic in the above-explained cases.
The Share of the Wages Consumed By the Consumer on a Given Commodity
The proportion of the income of a consumer is a primary determinant of the price
elasticity of ultimatum for a product. In a case where there is a high share of wages which is used
upon a commodity, the income might also affect the price elasticity of the demand for the good.
With increased expenditure on a commodity, there will also be a relative increase in the elasticity
of demand for the same, ceteris paribus (Coglianese & Kilian, 2017). There is inelasticity in
demand for goods like common salt, soap, and matches since households do not spend much of
their income on these goods.
When there is a rise in these commodities, there will be a very little or even no difference
in the consumer’s budget, and thus the consumers continue to buy more of the same quantity and
therefore making the demand for this quantity to be inelastic (Steve , 2017).
In another occurrence, the demand for clothing in some areas is elastic since the
households spend much of their income on clothing. Given that the price of the clothes falls,
there will, therefore, be increased savings and the quantity of the clothing demanded increases
(Bel & Gradus, 2016). If the price of the cloth goes up, then the household will not be able to
buy as much quantity as they bought before and this will lead to a reduction in the quantity of the
product that is demanded this commodity.

PRICE ELASTICITIES 7
The Complementarity amid the Goods
The joint ultimatum for given goods affects the price elasticity of demand. There is less
sensitivity in demand for goods that complement each other for the household. For instance, for
the running of the automobiles, the lubricating oil is used besides oil. If there is an increase in the
price of the lubricating oil, the cost of running the automobiles with increase very slightly since
the use of oil is very less when compared to the use of diesel and petrol. The demand for the
lubricating oil is then said to be inelastic just as the demand for salt (Nagle . & Müller, 2016).
Time Elasticity
Time affects the elasticity of demand for a given product. In a case whereby the time
involved is long, then the demand for this good will be more elastic. The latter happens because
the consumers can substitute goods in the long run. However, in the short run, it will not be easy
for the given good to be substituted. For the case of a long time, for instance, the prices of fuel
oil go up, and it might not be easy to substitute this kind of oil with the other types of oil like
coal or even cooking gas ( Janine , 2017). However, given sufficient time, people will make
adjustments and therefore end up using coal or even cooking gas whose prices have not risen like
the prices of fuel oil which has hiked.
The Possibility of A Good Being Postponed
This implies to the goods whose demand have the capability of being postponed to a
future date. If the demand for the commodity in question can be postponed, then the good is said
to be highly elastic. If the demand for this commodity cannot be postponed, then the demand for
the good will be inelastic. For instance, there is inelasticity in demand for medicine (Barry ,
2018).

PRICE ELASTICITIES 8
The Level of Price for a Given Commodity
This is mostly used to refer to the demand for the goods that are highly priced. The latter
includes goods like the diamond, imported vehicles and also jewelry which have an inelastic
demand. There is a very small change in the quantity of these goods demanded in response to the
changes in their price (Bel & Gradus, 2016). There is also inelasticity of demand for other goods
like cheap potatoes and matchboxes.
QUESTION 2
As far as Australians are concerned, the politicking in America could be a protract of a
soap opera which is played out in another part of the world and which might bring along several
consequences for the people of Australia. Australians, therefore, need to be much concerned
about the American president’s strategy in his yearn to make America great again. The president
does not welcome the free trade agreements since he has shown interest in withdrawing from the
transpacific partnership agreement and also the NAFTA ( Janine , 2017). Given that the president
succeeds in this move, then this would be a perfect replica of the post-war era.in the early 1970s
at a time when the tariffs in Australia were at high levels, there was a computable equilibrium
which was taking its root in Australia. The application of the ORANI model in Australia was
meant to quantify the profits or gains of cutting tariffs.
There were high costs in Australia which were caused by the increased tariffs, and these
were very dangerous to the exporters. By cutting down tariffs and importing goods, Australia’s
manufacturing sector was highly affected. However, in its place, the agricultural sector, the
mining sector, and the ORANI models indicated that the economic growth was positive.

PRICE ELASTICITIES 9
However, the arguments made at that time would be reversed if they were to be applied today
(Flair, 2016). The latter would be as a result of the threat issued by President Donald Trump on
his campaign trail since the United States of America issued a 45% tariff on the goods that come
from China.
The development of economic models is so much impacted upon by the presence of
ORANI models. Some of these economic models include the global GTAP, the Asian
Development Bank and the United Nations Conference on Trade and Development (UNICTAD).
The GTAP could be used to measure the effects of protectionism on the US-China relationship.
The world has little to fear, but nations should know that the latter will bring the world economy
into a foreseeable recession (Steve , 2017).
When we look at the china us isolation moves on tariffs, there are two clear messages
which are clearly shown: the tariffs are bound to aid the manufacturing industry in the USA, and
this will have little or even no impact except on China and USA. The tariffs will presumably
remove competition from imports. The high tariffs in China will make USA import goods from
other countries and then decide to export just a little fraction of its manufacturing products
(having in mind that China exports only a sixth of imports to America). There will be no diverse
effects on other countries like Australia. The US tariffs on China would lead to damage of
Australia’s two trading partners of Australia, and this would lead to the reduction of real income
to China by roughly 2% and the United States by at least 0.5%. Despite these impacts, the effects
in Australia are mixed, and the net output is almost equal to zero (Peter, 2016).
The US economy will turn out to be smaller, and this might turn out to be bad news for
Australia’s exports, the United States will reduce the imports from China and increase those
from anywhere else around the globe including Australia. The United States will also export less

PRICE ELASTICITIES 10
to the fest of the world, and this will also create another opportunity for Australia to expand its
exports (Barry , 2018). The Chinese economy will turn out to be small, and this will have a direct
impact on Australia’s economy and mostly in the resource sector. However, Australians will be
able to reach cheaper imports from the Chinese people which will improve the purchasing power
for the Australians.

PRICE ELASTICITIES 11
References
Janine , D. (2017, September 19th). What Has Australia to Fear from Trump Protectionism?
Retrieved from TTPI: http://www.austaxpolicy.com/australia-fear-trump-protectionism/
Barry, E. (2018, May 26th). What’s the problem with protectionism. Retrieved from The
Guardian: https://www.theguardian.com/business/2016/jul/15/whats-the-problem-with-
protectionism
Bel, G., & Gradus, R. (2016). Effects of unit-based pricing on household waste collection
demand: A meta-regression analysis. Resource and Energy Economics, 67(3), 163-179.
Coglianese, D. J., & Kilian, L. (2017). Anticipation, tax avoidance, and the price elasticity of
gasoline demand. Journal of Applied Econometrics, 32(1), 1-15.
Flair, J. (2016, March 21st). Five ways a Trump presidency would impact Australia – for the
worse. Retrieved from The Conversation: https://theconversation.com/five-ways-a-
trump-presidency-would-impact-australia-for-the-worse-56366
Miller, M., & Alberini, A. (2016). The sensitivity of price elasticity of demand to aggregation,
unobserved heterogeneity, price trends, and price endogeneity: Evidence from US Data.
Energy Policy, 97(1), 197-256.
Nagle ., T. T., & Müller, G. (2016). The strategy and tactics of pricing: A guide to growing more
profitably. Chicago: Routledge.

PRICE ELASTICITIES 12
Peter, H. (2016, May 23rd). United Fates. Retrieved from Fairfax Media:
https://www.smh.com.au/interactive/2016/us-election-impact-australia/economy/
Pigou, A. C. (2016). Industrial Fluctuations. Chicago: Routledge.
Steve , L. (2017, Jan 31st). Trump's protectionism biggest threat to US economy's growth, CNBC
Fed Survey respondents say. Retrieved from CNBC:
https://www.cnbc.com/2017/01/30/trumps-protectionism-biggest-threat-to-us-economys-
growth-cnbc-fed-survey-respondents-say.html