BUA4003 Principles of Economics Assignment 2 Sample

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BUA4003 Principles of Economics Assignment 2 Sample

Task 1: The Impact of Elasticity on Strategic Choices for Electric Vehicle Producers You are an industry analyst investigating the global EV market. In your research, you came across the following:

“In 2023, Tesla implemented multiple price adjustments across its model range”

“China's growing middle class and rising incomes have led to a surge in EV sales”

“The recent fluctuations in global oil prices have significantly impacted the adoption rates of EVs”

As an industry analyst, you have been tasked with providing a comprehensive report to help electric vehicle producers understand the importance of elasticity in their strategic decision-making. Prepare a short report (400-500 words plus diagrams) that addresses the following:

1. Price Elasticity of Demand:

• Explain the concept of price elasticity of demand (PED) and its significance for an electric vehicle producer. Illustrate how sensitive the demand for electric vehicles can be to price changes. [Hint: how would Tesla implementing multiple price adjustments across its model range affect the PED?]

2. Income Elasticity of Demand:

• Explain income elasticity of demand (YED) and how changes in consumer income levels can affect the demand for electric vehicles. Illustrate how rising incomes influence demand. [Hint: how would China's growing middle class and rising incomes have led to a surge in EV sales?]

3. Cross-Price Elasticity of Demand:

• Explain the cross-price elasticity of demand (XED) in the context of electric vehicles and their substitutes and complements. Illustrate how prices of related goods can affect the demand for electric vehicles. [Hint: how would the recent fluctuations in global oil prices have significantly impacted the adoption rates of EVs?]

Task 2: The Impact of Elasticity on Strategic Choices for Electric Vehicle Producers Consider yourself as an economist working for the Australian Federal government.

In your role, you evaluate issues relating to economic policy proposals. Your task here is to evaluate a proposal for Australia to reduce its air pollution by reducing its use of petrol cars and thus implementing a tax on for each litre of petrol sold. The aim of this policy is to reduce uptake of petrol-powered vehicles. You should focus on the importance of elasticity on the achievement of the objectives of the tax and discuss any potential unintended impacts of the tax (400-500 words plus diagrams).

Intended Learning Outcomes:

1. Apply economic frameworks for policy and business decision-making.

2. Research and apply economic concepts to predict how changes in economic conditions may impact individuals, businesses and industries within market structures.

3. Critically analyse economic data to explain relationships between economic variables and their impacts on policy, business and individuals.

4. Construct and present logical and persuasive economic arguments and communicate concepts professionally.

Solution

Task 1: The Impact of Elasticity on Strategic Choices for Electric Vehicle Producers

Price Elasticity of Demand (PED)

The Price Elasticity of Demand (PED) calculates the extent to which quantity demanded of a particular good change due to changes in price. For the producers of the electric vehicle (EV), this concept known as PED is essential when it comes to the right prices. This means that product is of elastic demand if consumption is sensitive to price changes and is of inelastic demand if consumption is not affected by price changes. Some factors affecting PED for EVs are the availability of close substitutes and the percentage of income earned spent on the product. Tesla has moved up and down several times to support the dynamics of PED. For instance, as pointed out by Archsmith, Muehlegger and Rapson (2022), there could be a down effect from price by highlighting that consumers regard EVs as a luxury good with substitutes. On the other hand, decreasing prices can increase the quantity demanded if the product is a price elastic one. PED has not been uniforming across Tesla models and various markets. Larger price increases might shift buyers to other brand or modes of transport, pointing to higher PED for those models. This goes to support the fact on how effective pricing strategies can significantly make a shift in the behaviour of users in different markets.

Figure 1: Price Elasticity of Demand
(Source: Archsmith, Muehlegger & Rapson 2022)

Income Elasticity of Demand (YED)

YED – stands for the Income Elasticity of Demand and it measures the percentage change in quantity demanded of a product in response to one percent change in consumers’ income. Is especially useful for firm planning to produce electric vehicles because income changes can greatly affect the demand of such products. For instance, a high YED signifies that the demand bumps up considerably as income consequently, a low YED means that demand relatively does not respond much to income variations. For instance, in the case of electric vehicles, YED is important for analysing how shifts in consumer income influence the demand for EVs. For instance, as the author Sheldon & Dua (2024) postulates, the increasing middle class and incomes in China have boosted the electric vehicle market. As incomes grow, consumers are willing to spend more for the car as well as for other necessary and luxury goods which include the high-end EVs. This is a fact seen with the rising sales of EVs in China where the middle class is becoming wealthier and consumers becoming more sensitive to environmental concerns.

 

Figure 2: Income Elasticity of Demand
(Source: Sheldon & Dua, 2024)

Cross-Price Elasticity of Demand (XED)

Cross-Price Elasticity of Demand (XED) measures the extent to which the demand of a certain good changes due to a change in the price of another related product. It is useful when analyzing the dependence of different products – substitutes or complements. Whenever XED is positive, goods are substitute goods; that is, if the price of one rise, demand for the other also increases. On the other hand, a negative XED is a signal that the goods are substitutes; the quantity demanded of one good declines as the price of the other good rises. Thus, using examples of electric vehicles (EVs), exact definition of XED can be provided with reference to the dynamics of global oil prices. Generally, operating petrol vehicles become expensive for consumers, especially when the international prices for oil rise. Hence the extra demand for EVs which are substitutes to cars powered by petrol will rise due to people’s desire to practice cost minimization. For instance, according to Chen, Carrel, Gore & Shi (2021), erratic trends in the prices of oil have led to increased EV demand since the costs of fuel push consumers to look for electric options which makes the XED between petrol cars and EVs positive. This relationship shows how changes in the price of related goods affects the market and consumers, thus emphasizing the implications of XED in the strategic business planning.

Task 2: The Impact of Elasticity on the Australian Tax Proposal

Australian government planned petrol tax will discourage petrol car usage and encourage the adoption of electric vehicles (EVs). price elasticity of demand (PED), cross-price elasticity (XED), and income elasticity (YED) must be an interlude to interpret spill-over of this policy because the understanding of these elasticities defines the behaviour of customers to consume petrol and adopt EVs.

Price Elasticity of Demand (PED) for Petrol

The PED for petrol quantifies the elasticity of demand for consumers to the price of petrol. Since petrol is a basic need for most users particularly those in the rural areas, most of the times its demand is inelastic implying that an augmentation in price attributable to taxes will lead to a minimal decline in quantity demanded. Since petrol is used by consumers particularly for essential transport needs, they may not be able to cut down their use in case of a price increase due to the unavailability of cheaper modes of transport like electric cars or public transport. Other power player policies well described by Goh et al., 2022 in the Australian context include the National Electric Vehicle Strategy that seeks to enhance EV accessibility and availability which will go a long way into making the demand for petrol more elastic. According to this view, the provision of large outlets of charging infrastructures for EVs coupled with promotions towards the acquisition of EVs could ease consumers’ switch from petrol and thereby enhance the effectiveness of the tax.

Cross-Price Elasticity of Demand (XED) Between Petrol and Electric Vehicles

Cross-price elasticity quantifies the change in the demand for one product (EVs) due to a price change in another product (petrol). The current chewing that must be present for the tax to achieve the intended goal of dampening the utilization of petrol cars is that as the cost of petrol rises, consumers will turn to electric cars. However, factors such as high cost of EVs at the initial stages and limited access to charging points lower this supply elasticity which in turn hampers the efficiency of the tax. Indeed, as noted by Valogianni et al. (2020), such barriers are countered by policies as the Low Emissions Technology Statement and incentives on using EVs. For instance, tax credits and rebates on EV purchases would increase the cross-price elasticity as consumers would switch to petrol cars when prices go high. Also, there would be a further increase in the perceived substitutability of petrol and EVs if there were increased charging stations in both the urban and rural regions.

Income Elasticity of Demand (YED) for Electric Vehicles

Income elasticity of demand (YED) influences the usage of electric vehicles (EVs) that may be luxury products. According to Jeon, Cho & Lee (2020), this may imply that those recognised as the lower income category may find it hard to afford EVs and this makes the petrol tax affect the above group as petrol prices rise. To this end, the government has formulated measures such as the Clean Energy Finance Corporation (CEFC) that offers funding for EVs. These efforts for university assignment help are in an attempt to expand the income level that can afford EVs hence decreasing the tax’s regressiveness and increasing the overall response of petrol demand. This approach is very important to be able to make the transition towards cleaner means of transport in a way that transports with relatively lower emissions have an equal opportunity to compete with the current conventional and heavily polluting transport means.

Unintended Consequences of the Petrol Tax

The petrol tax, which is expected to decrease the quantity of fuel used, might have the following effects. Budget-conscious rural consumers and low-income earner families who rely on petrol and have no access to infrastructure for EVs could be worse off with even higher costs to meet, thereby further widening the chasm of inequality within society. Hensher, Wei & Liu (2021) argue that Industries which rely on petrol are likely to have high operating costs, causing inflation. Furthermore, if EV market fails to provide more cars to the market due to challenges in the supply-chain or infrastructure problems, consumers may be forced to pay more premium and wait longer for cleaner vehicles. This means that the incentives offered under the policy should be improved in order to address these barriers in an effort to make the tax less regressive and restrict its effectiveness in promoting EV use.

References

Archsmith, J., Muehlegger, E., & Rapson, D. S. (2022). Future paths of electric vehicle adoption in the United States: predictable determinants, obstacles, and opportunities. Environmental and Energy Policy and the Economy, 3(1), 71-110. https://doi.org/10.1086/717219

Chen, Z., Carrel, A. L., Gore, C., & Shi, W. (2021). Environmental and economic impact of electric vehicle adoption in the US. Environmental Research Letters, 16(4), 045011. https://doi.org/10.1088/1748-9326/abe2d0

Goh, H. H., Zong, L., Zhang, D., Dai, W., Lim, C. S., Kurniawan, T. A., & Goh, K. C. (2022). Orderly charging strategy based on optimal time of use price demand response of electric vehicles in distribution network. Energies, 15(5), 1869. https://doi.org/10.3390/en15051869

Hensher, D. A., Wei, E., & Liu, W. (2021). Battery electric vehicles in cities: Measurement of some impacts on traffic and government revenue recovery. Journal of Transport Geography, 94, 103121. https://doi.org/10.1016/j.jtrangeo.2021.103121

Jeon, W., Cho, S., & Lee, S. (2020). Estimating the impact of electric vehicle demand response programs in a grid with varying levels of renewable energy sources: Time-of-use tariff versus smart charging. Energies, 13(17), 4365. https://doi.org/10.3390/en13174365

Sheldon, T. L., & Dua, R. (2024). The dynamic role of subsidies in promoting global electric vehicle sales. Transportation Research Part A: Policy and Practice, 187, 104173. https://doi.org/10.1016/j.tra.2024.104173

Valogianni, K., Ketter, W., Collins, J., & Zhdanov, D. (2020). Sustainable electric vehicle charging using adaptive pricing. Production and Operations Management, 29(6), 1550-1572. https://doi.org/10.1111/poms.13179  

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