Hi folks, time for a new chapter.. call
this chapter six and part one.  We're
going to talk about the price elasticity
of demand as an exemplar for
elasticities,  generally speaking,  but the
price elasticity of demand is oftentimes
one of the most important elasticities
that you'll deal with.... and it'll help us
to learn about the concept.   The concept
of elasticity isn't difficult at all,  I
don't think,  but learning to work through
some of the equations and how to plug in
and calculate can sometimes get a little
fuzzy,  so I'll try to clean that up as we
go along.  Okay the first thing that you
want to make sure that you're straight
on is that elasticity is a general tool. 
It can be used for anything, so if we
start talking about the elasticity of
something A with respect to something B,
in an equation form this would be the
percentage change in A divided by the
percentage change in B.  Okay.. and that
would be discussed as the elasticity of
A with respect to B.  Now that might be
how many kisses you get at the end of
the date when you change the percentage
of roses that you bring at the beginning
of a date...
What percentage increase in medals might
you win, when you increase the amount of
practice hours..... Earnings related to
education.... you can really use any of these
two variables together... okay or any two
variables period.  We'll focus first on
this quantity demanded and price
relationship, and the generalized way
that we would write this is the
percentage change in quantity demanded
with respect to the percentage change in
price....  And this is an obvious and
sensible thing to be concerned with,
because any producer is going to start
to wonder as prices change how will
quantity demanded change with it.   You
know that as price goes up you're going
to lose some quantity demanded, but you'd
like to know how much.  Is it going to
be a big response.... is it going to be a
small response...how is that going to
affect total revenue... right?   Okay, when you actually calculate out the numbers for
those elasticities they're going to fall
into three ranges.  If that number comes
out to be greater than one, after you
take the absolute value of it, then you
are going to have an elastic response, 
and note this absolute value. If you
think about it price and quantity
demanded are inversely related, so it
would imply that that fraction from our
last slide was always negative.
Economists generally don't like to deal
with that,  oftentimes they'll take the
absolute value so that they always have
it in positive numbers.  It's just easier
to talk about elasticity getting bigger
as the number gets larger,  so for the
purposes of our lecture I'll always assume
that we're going to use the absolute
value bars on that general equation that
we put out last time.  Okay so if you
calculate that and you get a number
that's greater than one, then this means
that the percentage change that you got
out of the quantity demanded (right?).. it
was larger than the percentage change in
the price....so something like there was a
10% increase in quantity demanded when
there was a 5% decrease in price... take
the absolute value of this and we end up
with a value of two,  so your elasticity
would be equal to two.  It's greater than
one and we would describe this as
elastic, or some people like to think
about it as responsive, sensitive is
another synonmy.  What it means really
is that for every one percentage
increase in price you can expect that
there will be a two percentage decrease
in quantity demanded,  keep in mind we took
the absolute value,  otherwise this
would have been a negative 2
- okay now sometimes you'll calculate
these numbers out and you'll find that
you get something like there was a 5%
decrease in quantity demanded when there
was a 15% increase in price,  and of
course with the absolute value bars
you're going to find that this is going
to be equal to 0.33...(right?) with a bar
over it I suppose...
a third essentially--Less than one,  and if
it's less than one then you're going to
refer to this as inelastic... or you could
think about it as not being particularly
sensitive to changes in price.   Lastly you
could calculate it out and you could
find that there was a situation where
perhaps there was an 8% increase in
quantity demanded when there was an 8%
decrease in price, and you'd have a value
of 1.  If you have a value of 1 it means that
you are gaining the same percentage and
quantity demanded that you are losing in
price,  or vice versa-- Unit elastic is
another way that we describe this.  These
are the three ranges.  We'll come back to
them in a secon, because you're going to
see that they're really relevant for
what's happening with total revenue.  Okayso we know that when we do our
calculations with quantity numbers and
price numbers if we see that the number is
greater than 1 it's elastic,  or we're going to
describe it as sensitive, if it's less than
1 it's inelastic.   Another way you can think
about this though is what makes it
likely that you're going to see an
elastic or an inelastic response for any
particular good.  Well here's a list of
determinants and we can start talking
about these and their relationship to
elasticity.   So this first one here, more
substitutes, the more substitutes that
you have the larger that you are going
to expect the elasticity to be,  all else
held constant, right??  More substitutes
means that if the price goes up it's
pretty easy for the consumer to find
another option, so you're going to expect
to see that quantity demanded drops
pretty precipitously. 
The larger and larger the share of the
budget-- you will also expect that you
have a higher price elasticity of demand.
It occupies a large portion of their
budget-- they're going to be pretty
sensitive about it.  On the other hand if
it's something like a pack of gum and
it's really cheap they might not even
notice if you raise the price.  You are going
to end up with a very low price
elasticity of demand.  The more narrowly a
market is defined the more that you are
going to expect that you end up with a
higher price elasticity of demand.  You
can think about this market definition
and its relationship to substitutes.  if
you're talking about something like a
plasma screen television,  a plasma screen
television is going to have a higher
elasticity, price elasticity of demand,
then you would expect televisions in
general to have.  The reason being is that
if the price of a plasma screen TV goes
up, you can pretty easily go and pick
some other kind of television; however, if
the price of TVs rises in general you
might have a more difficult time
replacing them.  There aren't as many
substitutes.  So the more narrowly defined
the market the higher you're going to
expect the price elasticity of demand to
be.  Okay the last one we'll talk about is
the long run, and what I mean by the long
run is just essentially elasticity
changes over time.  When you force a
higher price on someone in the short run,
immediately.  It's difficult sometimes for
them to change behavior to cut back on
quantity demanded as much as they might
if you gave them more time.  If you give
them more time they can find other
acceptable substitutes, they can
rearrange their consumption bundles, they
can do all kinds of things to help them
avoid those higher prices for your good.
A good example of this is gasoline.
Gasoline in the short run is very very
likely to be inelastic; however, in the
long run we would expect it to show a
more elastic response,  at least relatively
more elastic than it was before.
If the price of gasoline goes up by two
dollars a gallon today you're going to
have a hard time buying any less gas
than you probably would have bought
anyhow.... but if it stays like that, then over time you're going to start figuring out
car pools, you might ride your bus to
work,
you might start figuring out van shares,
anyway to start.. you know... arranging trips
and errands so that you use less gas. 
You'll figure out ways to buy less gas
if gas is going to be that much more
expensive.  Okay so given enough time in
the long run we would expect that
elasticity is going to be higher than it
would be in the short run.
