Price Elasticity of Demand - Assignment Example

Name: Lecturer: Course name: Course code: Date: Price elasticity of demand Question One Reasons for increase in Price in Electricity in gas The following are some of the reasons as to why there is increase in the prices of electricity and gases. These include: i. Increase in the Prices of substitute goods focusing on the development of green source of power. ii. Increase in the rate of feed-in tax and also iii. Enforcement of carbon duty As a result of the increase in the prices, most of the consumers have been greatly affected. The reason for the increase in the prices of gas and electricity include the following The diagram above clearly demonstrates how the price of a product affects the demand. When the price of electricity drops from P1 to P2, the quantity demand will also change from Q1 to Q2. Before the consumers make any purchase decision, they consider the amount of utility derived from the product against the price of a product. In case the anticipated utility matches with the product, the consumer will consider buying a product, and will consider otherwise if the anticipated utility will not have been met (McEachern). Given that Electricity and Gas in South Australia are the fundamental possessions, any attempt to raise the n prices will make the customers suffer by paying higher prices on gas and electricity. At the end of all, the consumers will have to suffer cost-effectively by paying higher prices. Question two Demand elasticity This is a process whereby the increase in price of some commodities in a market place has some proportionate effect on the demand. For instance, in case there is an increase of price of a certain commodity by 10%, the quantity demanded for the same price will decrease by 1%. In the case of inelasticity of demand, any increase in the prices of goods and services in the market does not affect the demand (Krugman). For example if the prices of a given commodity increases at 10%, the quantity demanded decreases considerably by less than 10%. The demand for the gas and electricity in Australian market can be considered as inelastic. The consumers will have no other choice rather buying gas and electricity since they are the basic commodities. What determinants the ‘Price elasticity of demand’ of electricity There are several factors that decide the price elasticity of demand of electricity in the market. Some of the factors include: Income of the consumer used up on electricity. When there is high expenditure on the consumption of electricity, the demand will be elastic. This illustrates that in case a consumer spends a greater amount of income in a certain commodity, any change in price will lead to elastic demand. Accessibility of substitutes- In case there are close substitute that can be accessible with the same price; the quantity demanded will be elastic. This can therefore mean that when there are several substitutes available for a given product, there will be a greater elasticity of demand. For instance, the focus will be to come up with green sources of power as an alternative for gas and electricity The uses of electricity-when there are more users of the commodity, there will be greater price elasticity Time taken to adjust-when longer time is taken to adjust to the demand of the electricity, there is a possibility of high price elasticity. This is because it takes time for consumers to adjust their buying behaviour therefore it takes some time for the consumers to be aware of the new prices in the market. The distributers of electricity will be negatively affected by the increase in the prices of electricity. This come a result of less consumption of electricity by the consumers as a result of increase in prices therefore reducing the amount of sales made by the distributers. Question Three Price ceiling This refers to a situation whereby the government safeguards to the low income earners by introducing a price level that a seller or a distributer is permitted to charge for the supply electricity (Taylor). This is usually set below the equilibrium price since the government regards that price set by the forces of demand and supply is very high for the consumers. This can be demonstrated in the below diagram: In the diagram below, Pe an nd Qe are price and quantity as determined by forces operating in the market. The governments regard as that the highest price of electricity Pe as determined by the market forces of demand and supply is too high, especially for low income consumers (Krugman). The government therefore decides to fix a disequilibrium price such as PMAX such that the price has to be legally reduced from Pe to PMAX. The maximum price can, therefore, benefit low income consumers and can be used as one of several non-inflationary measures aimed at dealing with the negative effects of inflation. Incase South Australian government implements a price ceiling given by PMAX; there will be a scarcity of electricity indicated by (Q2-Q1). This will lead to consumers; particularly those from poor background from the community to be supported by the lowering price, but suppliers will lessen the supply of electricity (John E. Mulford). Users of electricity will also not be able to meet their needs at PMAX and thus resulting to excess demand which will spill over into other related markets and therefore resulting to increase in prices in those markets (McEachern). Conclusion Should there be a control in the price of basic commodities, this will imply that there may be a shift in production to luxury production of luxuries where price control is not applicable. Moreover, several firms that cannot get better their costs from the profits gained as a result of charging maximum prices therefore leaving price-controlled industries with a subsequent fall in employment Work Cited John E. Mulford, United States. Dept. of Housing and Urban Development. "Income elasticity of housing demand: housing assistance supply experimentIncome elasticity of housing demand." Rand, 2009. Machlup, Fritz. "International Monetary Economics: Collected Essays." Routledge, 2007. 56. McEachern, W.A. "Contemporary Economics." Newyork: Cengage Planning, 2011. Taylor, John. "Principles of Macroeconomic." Cengage Learning, 2008. 96. Read More