Hey,
you already know the law demands says there's an inverse relationship between price and quantity
So the price goes up for a product people buy less the price goes down people buy more
but the question now is how much less or how much more they buy and that's the idea of elasticity
Elasticity shows how sensitive quantity is to a change in price what happens to quantity when there's a change in price depends a lot on
the type of product first we are gonna talk about the idea of
inelastic let's talk about Gasoline gasoline has inelastic demand this means when there's an increase in the price of gasoline
the quantity demanded decreases, but just a little bit
So when the demand is inelastic the quantity is insensitive to a change in price
And it goes the other direction when the price falls the quantity demanded goes up
But just a little bit. Right, you don't jump in your car when the price goes down and grab your engine
At stop signs that's not what you do
So when the price goes down you buy a little bit more when the price goes up you buy a little bit less
insensitive to a change in price. the reason for this is because
Products that have an inelastic demand have very few substitutes. When it comes to gasoline. There's nothing else
I can put my car and God knows, I'm not walking
I'm American. That was a joke to all you guys who are environmentalist. I apologize. I don't want to hurt your feelings
I love trees. I will hug one. I love you.
I love you so much
In addition to having few substitutes gasoline is also a necessity, and it has elasticity coefficient that is less than one (<1)
whoa coefficient! no math! can't stand math! listen,
There's Gonna be a little bit of math in microeconomics
But it's nothing crazy. One of the things you got to watch out for is freaking out when you hear things like coefficient
It's not that hard. The elasticity of demand coefficient is the percent change in quantity,
divided by the percent change in price
Which is not hard at all is trying to say is that when there's a small
Change in quantity when there's a big change in price, this number is less than 1 and if it's less than 1 its inelastic demand
Real quick, we're talking about absolute value remember when the price goes up the quantity always goes down
so we're talking about the absolute value of the elasticity of demand coefficient. The point is when there's an inelastic demand the
Quantity is insensitive to a change in price. So what if demand is elastic?
that means quantity is sensitive to a change in price, so right here when the price goes up
the quantity decreases a whole lot, and when the price goes down the quantity demand goes up a whole lot
So when the demand is elastic it means that these products have many substitutes
Or they're luxuries, or they have elasticity coefficient
Greater than one (>1) a big change in quantity as a result of a small change in price
now, what if the percent change in quantity is exactly equal to percent change in price?
Well that's something called unit elastic. unit elastic is the idea if the price goes up 20 percent, then the quantity goes down 20 percent
this pops out a 1. A 1 means unit elastic
What if the demand is a vertical straight line or something called perfectly inelastic?
well that means an
Increase in price has no effect on quantity. the quantity doesn't change so the percent change in quantity is zero whenever there's a percent change in price
And so the elasticity demand coefficient is zero
That's the idea perfectly inelastic
And if the demand curve is horizontal
Where a firm cannot change the price at all. they change the price no one's going to buy that would mean that the elasticity demand
Coefficient would be infinite. all this will make more sense when you see them side by side
So take a look at this. what you're looking at is five different demand curves perfectly inelastic,
relatively inelastic, unit elastic, relatively elastic and perfectly elastic and you can see the
elasticity coefficient is zero,
Less than one, one, greater than one and infinite. this shows you
the more substitutes a product has, the more sensitive it is to a change in price, the greater the elasticity demand coefficient
Does it make sense? bonus round!
One of the most important topics you're going to see is something called the total revenue test
So this tells you what happens to total revenue when there's a change in price if the demand curve is inelastic or elastic
It'll make more sense on a graph over here on the left
We have inelastic demand. Right here on the right,
We have elastic demand. the total revenue is the price times the quantity it's this box right here
Notice how the box on both graphs starts exactly the same size. when supply shifts to the left
that causes the price to go up. notice that on both curves the price goes up and the
Quantity goes down. remember, the law of demand is at play here. when the price goes up the quantity goes down
We're not analyzing that but we're analyzing is the total revenue
The size of the box. so for inelastic demand the price went up a whole lot, but quantity decrease
Just a little bit and so the size of the box got bigger that means when the demand
is inelastic the price goes up the total revenue goes up
or when the price goes down the total revenue goes down and that explains why gas stations never have sales
Right, there's no reason for a gas station to have like a half off gas sale
Because they lower their price the total revenue is not going to increase
But let's take a look at elastic demand
When the price goes up a whole lot of people don't want to buy it and so the size of the total revenue box gets
Smaller so when the price goes up total revenue falls and when the price goes down, total revenue goes up
That's why products that have
elastic demand will have sales all the time. now what you're going to see on a test is a question that says if there's a
Given product, Product X, and the price goes up and the total revenue goes down
What must be true? The answer is it's elastic demand. right, if the price goes up and the total revenue, the box gets smaller,
That's elastic demand
Bonus bonus round!! one of the things I do to help students understand the total revenue test is given this thing to do with their hands
so if the price goes up for product and the total revenue goes up, I look like an "I"
I look like an "I" the demand is "I"nelastic
right, price goes up total revenue goes up
The other way to look like an "I" is when the price goes down and total revenue goes down. I look like an "I"
I'm "I"nelastic demand. if the price goes up and total Revenue goes down. I don't look like an "I".
I'm elastic demand. if price goes down and total revenue goes up
I'm not an "I" it must be elastic demand
So this is going to help you on a test if they say the price goes up for a product and the total revenue went
up, you look at yourself. You look like an "I", inelastic demand. I hope this video helped you understand
the idea of elasticity and the total revenue test. And make sure to subscribe
And take a look at the next video that explain cross price and income elasticity. Also, check out my series of videos called
Econ Movies, alright? Till next time!
ENG CC By: Tammie Ng Lin Ern
