Factors Affecting Price Elasticity of Demand

1. The price elasticity of demand is a measurement that is used in economics which shows responsiveness or elasticity of the quantity demanded for the services and goods. The price elasticity are negative in nature. The revenue is maximised when the price is set so that the price elasticity of demand is one. The measure of elasticity is sometimes referred to the own price elasticity of demand. Demand extends or contracts with the change in price. Elasticity is the change or responsiveness of the demand to the change in price (Jones, 2017). The demand for products can be both elastic and inelastic in nature.  Demand will be elastic in nature when there will be a small change in price with a change in the demand. The inelastic demand means that any amount of fall in the price of the commodity would not induce any kind of extension in the demand. However in some cases the conditions and more or else unrealistic.

                                                                           

The factors which will affect the demand for goods are:

• Availability of the substitutes: one of the important factors which affect the elasticity of demand is the availability of the substitutes. When the commodity will be having close substitutes, the demand will be elastic in nature. On the other hand when the product does not have many close substitutes, the demand will be inelastic nature.  When the price of the product goes up in case of elastic demand, people will tend to buy the close substitutes whereas when the product is inelastic nature, the rise in rice will not affect the demand of the product.

                                                                      

• Proportion of the income of the consumer which is spent on the commodities: the second factor which affects the elasticity of demand is by how much consumer budget will be affecting the commodities. Greater the proportion of income spent on the commodity, the higher will be the elasticity of demand.  The demand for necessities such as soap, matches, salt are inelastic in nature because the consumer spent only a small portion of the income for buying these kinds of goods. Therefore it can be said that when the household spend a huge part of their income in buying specific products, the price elasticity of that particular good is tend to be highly elastic in nature.
• Total number of the uses of the product:  the greater is the amount of uses which a commodity has, greater will be the price elasticity of demand. When a particular commodity will be having a huge number of uses, the commodity will be having an elastic demand. When the price of the commodity which have several uses are seen to be high, the demand will be quite small in nature. Then in that case it will be put for important uses. On the other hand when the price of the products goes down, it will be put to less important uses and consequently the quantity demanded will increase after that. When the price increases to high level, the product at that time will be only used for essential purposes. On the other hand when the price will not increase at a high level, the commodity will be made to use for many essential purposes.
• Number of complementary goods present: the presence of complementarity among the goods affects the price elasticity of demand. People are known to be less sensitive in nature with the changes I the price of good which are generally complementary to each other or also which are jointly used when compared to those goods which will be having independent demand or are used alone. When the price of the complementary products increases, there will be increase in the demand of those products. On the other hand when the price of the complementary goods increases, the demand for the particular products will increase.
• Time and elasticity: The element of time will be also influencing the elasticity of demand for the product demand will be highly elastic in nature when the time involvement is quite long. The reason behind this is that the consumers will be able to substitute goods in the long run. In case of short run, the substitution of one commodity by another is not that easy.  The longer is the period of time, the greater the consumers and businessmen can substitute one commodity for another easily. When the firms find out that the price of the products have risen, then it will be not always possible for them for substituting the material by the cheaper ones.
• Weather: the demand for goods also depends on the condition of the weather.
• Nature of the product: the elasticity of a demand of good also sometimes gets influenced by the nature of goods. A commodity for the products may be necessary, comfort or it can be even luxury. When the commodity is a necessity, the demand for good will be inelastic in nature that suggests that demand will not be fluctuating with the change in price. In case of luxuries goods, the demand will be more elastic in nature hen compared to the other goods.
• Habits: products which will become habitual necessities for the consumers it will have less elastic demand in nature. When the products become a necessity in nature for the consumes, people will continue to purchase it even when the price rises which states that the good is inelastic in nature.

Some of the examples of the elastic goods are motor vehicles, furnitures, transportation and the inelastic goods includes gas, electricity, clothing, tobacco and oil

2. The protectionism is a policy of protecting the domestic industries which are imposed against the foreign competition through the tariffs, subsidies and the import quotas or any type of restrictions in the imports of the foreign competitors.  In order to save the manufacturing jobs of the United States President Trump imposed 25% tariff on the steel and 10% tariff on the aluminium. In the short term there will be only limited impact on the business of Australia.  The trade protectionism takes place for protecting the jobs and industries for national security, protecting the consumers and for saving the infant industry.

One of the major effect of the trade protectionism is the trade war which will arise among the nations.  One of the significant problem with the trade protectionism is that nation will be taking reciprocal; actions when the trade protection policies will be put in to effect. Incise of short term effects, the imported goods cannot be easily and readily substituted and the consumers therefore will be facing huge problems.  This will result to negative impact on the gross domestic product. The effect will be on consumption, employment and the investment. The economic activity will also go down when the exports of the United States are hit by the tariffs along with the lower imports.  Consumers will be delaying the expenditure and the business for postponing the business.  Imposing tariff will also reduce the wealth, increase the cost of investing and also discourage the demand.

The protectionism of the United States which is bad for all the consumers.  The basic idea of the trade policies is imposed in the hope that the imported products will be replaced by the goods and services which are produced by the domestic companies. Although the concept is not right as the protectionism will generally reduce the domestic gross domestic product and the employment. It can also be said that the price of the products made in America would be much higher than those of the imported goods. The reason behind this is that without the high trade barriers, the producers of the United States will not be competitive in nature which will increase the price level of the United States. Due to the low exports, it will lead to low production, low employment and low income.

Examples of Elastic and Inelastic Goods

The size of the damage of the economy depends on the extent of protectionism. This would lead to substantial losses in income and Gross Domestic product in the US economy. When Trump imposes protectionism policies consumers will generally have only limited choice and therefore they have to pay much more for the goods and the services. The citizens of America will be having only limited choice of products since there will be quotas on how much it is to be imported. The protectionist policies which safeguards the industries, companies and the jobs means that the consumers have the limed availability of the goods and needs to settle for poor quantities instead.

                                     

Besides various short term impacts there will be presence of long term impacts as well. It have been found out that the trade openness will lead to growth in productivity and therefore will lead to long run potential output.  With the openness to trade, there will be presence of competition from trade and the benefits offered by large markets will also encourage efficient allocation of both capital and labour across the firms.  Barriers to trade will lead to decline in productivity and output. The growth rate of the economies will also slow down after sometime. As a result of globalization all over the world, it have boosted the living standards in the whole world ad also lifted millions out of poverty. Protectionism will lead to trade war among the people of different countries which would also add to global uncertainty. The impact of the protectionism can be even worse when the deteriorations in the relationship with trade would be compounded with weaning of the regulatory agreements. With the rise in the protectionism, the infant industries will never be growing up. The reason behind this is that of the trade protection policies of the government. The protection of the infant industry might also cost the government a significant amount of money along with enough financial resources for protecting the infant industry.  This will also lead to inefficiency of the infant industry. This type of protectionism will also hinder the growth of the maturation process which are vital for the infant industry which is experience in both short run and long run in case of competitive in global markets.

Though the policymakers and the economist’s fees that the trade protectionism will help the economy of the nation, it can lead to serious damage in the economy. The protectionism is a kind of economic policy of restricting the imports from the other countries through the various methods such as tariffs, on the imported goods and import quotas in nature. There are very less advantages in case of protectionism. The protectionism policies most of the time is disadvantageous in nature. The trade protectionism is a kind of policy that limits unfair competition from foreign industries.  Countries use a variety of strategies in order to protect the trade. The United States does not gains on a wider scale by the Trump’s protectionist policies which will also raise the price the price of the imported goods.

Reference list

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