Elasticity

Elasticity

Elasticity is the measurement of how the economic variable will be responding to the change in another variable. It can also be stated as the ratio of the percentage change in one variable to the percentage change in another variable.The elasticity of demand states that by how much the amount bought can decrease when the price increases.

Elastic demand: elastic demand takes place when the price or any other factors have a huge effect on the amount that the consumers want to purchase. The relationship between the price and the quantity purchased is measured with the help of law of demand (Baumol & Blinder, 2015). The law of demand states that the quantity purchased will be having an inverse relationship with the price. The elastic demand takes place when the percentage change in the quantity demanded will exceed, he percentage change in price This will make the ratio greater than unity. When a particular product is known to experience an elastic demand, it suggests that consumers will be doing a lot of comparison shopping.  

Inelastic demand

Inelastic demand is a situation in which the demand for the product will not rise or go down with a change in price. The inelastic demand can be a highly desirable situation from the supplier’s point of view .The reason behind this is that when the good is inelastic in nature, then the rise in rice will also increase the total revenue.

Availability of close substitutes

The product which generally have a large number of substitutes tend to be more elastic in nature. The reason behind is that a small increase in the price of the product will induce the consumers to go for its substitutes. Like for example a rise in the price of coke which is an elastic good which will encourage the buyers for buying Pepsi (Cowell, 2018). The availability of the close substitutes makes the demand much more sensitive to the change in price. On the other hand, when the products will be having fewer or no substitutes, it will have less price elasticity of demand. For example, when the price of the caffeine will be going up, there will be very little change in the consumption. The result behind this is that there will be few good substitutes which can substitute caffeine.

Length of the time involved

The second significant factor which affects the elasticity of demand is the time period. The time period can range from a day to a month, a year or a period of several years. The elasticity of the demand is also known to vary directly with the time period. The demand is known to be inelastic in the short period (Low 2016).  This happens because consumers find it quite difficult to change its habits in the short run in order to respond to a change in the price of the commodity. However, in the long run, the demand will be more elastic in nature as it will be more elastic in the long run, since it will be easier to shift to the other substitutes when the price of the product will increase

Elastic Demand

Luxuries v/s necessities

The nature of the product usually affects the elasticity of the demand. The product can be either a necessity or a luxurious good. When the product will be a necessity, the demand will be usually inelastic in nature. People will continue to pay higher prices for the goods which will be required for survival or comfort. therefore, at that point of time, people will be paying high prices for it. For examples, wheat and rice.

When the product is luxurious in nature, the elasticity of demand will be naturally high. The reason behind this is that the consumption of the luxurious good, unlike the necessary good, can be deferred. When the price of the luxurious good increases, the demand for the product will be increasing (Baumol & Blinder, 2015). On the other hand, when the price of the luxurious good diminishes, the demand for the product will be increasing. therefore, it can be said that demand for the luxurious good will be more elastic in nature.

Number of uses

When the commodity will be having several uses, then the demand of that particular commodity will be elastic in nature. When the price of the product will be increasing, then at that time it is put to more urgent uses and then the demand falls. When the price of the similar product falls, then it will be used for satisfying less urgent needs and then the demand will increase. For example, electricity will be having multiple use. The fall in the price will result in increase in demand and will be put to greater uses. On the other hand, a commodity with few alternatives will be having a less elastic demand.

Commodities such as soft drinks, biscuits, electronic appliances have highly elastic demand as their consumption can be postponed when there is increase in the prices. On the other hand, commodities like drugs, medicines have inelastic demand as a result of their immediate requirement.

Trump have announced protectionist policies which includes tariffs on $60bn worth of the Chinese imports. this has resulted in a trade war which have threatened to engulf the global economy. This will make the consumers of both the United States and China suffer from the decreased demand and the higher prices of goods. Although other countries will be facing collateral damage.

Trade protectionism is a kind of policy which will limit unfair competition from the foreign industries.  Trade protectionism is a politically motivated defensive measure which can be good in the short run but it will not work in case of long run.

Inelastic Demand

Some of the advantages of the trade protectionism are:

Protectionism will help in protecting jobs for the people residing in the united states of America. When the country will grow strong in a new industry, tariffs will be protecting it from the foreign competitors which will give the companies of the new industry a lot of time to develop their own competitive advantages (Trump sanctions could mean trade war in China. 2018).  Protectionism might also help in creating jobs in the united states temporarily for the domestic workers. The protectionism which comprises of quotas, tariffs or subsidies will allow the domestic companies to hire locally.

Trade protectionism will prevent dumping. In this case the foreign and the bigger economies will be entering an economy and sell their goods at a price much lower than the cost of production. This makes the buyers of the specific country to spend more than the buyers of the overseas areas.

The protectionism can also improve the economic wellbeing of the nation.  The protectionism is a kind of policy used for protecting the domestic industries which are imposed against the foreign competition through subsidies, import quotas and tariffs.

 The protections made by trump is harmful for all the consumers. The basic ides of the protectionism are that the imported products will be getting replaced by the goods and services which will be usually produced by the domestic consumers The concept does not work in case of long run since it will be reducing the gross domestic product of the nation and the employment rate.  It can also be said that the products which will be made in the united states would be much high than those of the imported products. One of the main disadvantages is that the producers of the united states will not be as competitive in nature which will result to rise in the level of price in case of Americans. With the fall in exports, it will result in low production, low income along with the employment.  when trump will be imposing protections policy, buyers will be having very limited choices and therefore, they had to pay much more prices for the products since there will be quotas on how much products need to be imported.

One of the significant effects of protectionism is the trade war which will take place between the nations. In the short run, the products which are imported will not get replaced easily as it will be tough to get substitutes for them. This will result in negative effect on the gross domestic product. The economic activity will be going down when the exports will be affected by the tariffs and the business will also start to postpone (Australia could benefit from China-US trade war. 2018). Imposing tariff will be reducing the wealth, increasing the cost of investing and discouraging the demand. The size of the damage of the economy will be depending on the extent of protectionism. It has been found that trade openness will be leading to growth and also will lead to long run in the potential output. With the openness of trade, there will be presence of competition from the trade and the benefits offered by the large markets will encourage efficient allocation of both capital and labour across the firms. The economy will be slowing down after sometime after the tariff is imposed (Hubbard et al., 2015). The tump’s protectionism will be leading to trade war among the citizens of the different countries which can be also disadvantageous in nature. As barriers to trade will be resulting in decline in both output and productivity. This will also lead to slow growth rate of the economy after sometime.  Globalization and trade openness resulted in boosting of the economy and also increases the living standard in the whole world.Trade protectionism will be also leading to global uncertainty. When the protectionism will be increasing, the infant industry will also never grow. Therefore, it can be said that trade barriers will be hindering the growth of the infant industries and the process of maturation which is quite significant for the infant industries which is experienced in both the long run and the short run.

Although the policymakers feel that the trade protectionism policies will be helping the economy of the nation, it can cause serious damage to the economy (What is a trade war and why should I worry?. 2018). The protectionism is a kind of economic policy which will be restricting the imports from the other various through imposing tariffs and quotas. It can be said that protectionism policies are dangerous for most of the time in nature. Therefore, the united states of America will not be gaining on a huge scale by the Trump’s protectionist policies which will be raising the price of the imported goods.

Reference list

Australia could benefit from China-US trade war. (2018). Retrieved from https://www.news.com.au/finance/economy/world-economy/australia-could-be-a-winner-in-chinaus-trade-battle/news-story/86b8909a7e1fb86fb2ddc54d85b06532

Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Nelson Education.

Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.

Hubbard, G., Garnett, A., Lewis, P. & O’Brien, T., (2015). Essentials of economics. Pearson Australia: Frenchs Forest

Hursh, S. R., & Roma, P. G. (2016). Behavioral economics and the analysis of consumption and choice. Managerial and Decision Economics, 37(4-5), 224-238.

Trump sanctions could mean trade war in China. (2018). Retrieved from https://www.theaustralian.com.au/news/inquirer/trump-sanctions-could-mean-trade-war-with-china/news-story/25afddb540aca3e45c0c3230c9f19beb

What is a trade war and why should I worry?. (2018). Retrieved from https://www.bbc.com/news/world-43512098