More on Elasticity of Demand Looking a bit deeper at why elasticity changes despite having a linear demand curve
More on Elasticity of Demand
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- What I want to do in this video is
- focus a little bit more on the results of the last video.
- Make sure that they make intuitive and mathematical sense to us
- because something slightly strange happened.
- We had a linear demand curve right over here,
- which means for any given change in price right over here.
- So in all of the examples,
- whether we went from A to B or C to D or E to F,
- we had a $1 drop in price.
- we had a $1 drop in price.....a $1 drop in price.
- And every time we had a $1 drop in price
- we had a $2 increase, oh sorry,
- we had a 2 unit increase in quantity demanded.
- So we had a 2 unit increase in quantity demanded.
- This is a linear demand curve.
- But despite the fact that for each dollar drop in price,
- we had the same increase in quantity demanded.
- The slightly maybe un-intuitive thing that happened
- was that we had a slight, we had a different -
- actually very different elasticity of demand.
- And you might imagine that
- it probably had something to do with the fact that
- elasticity of demand is based on
- % change in quantity relative to % change in prices,
- instead of just change in quantity over change in price.
- If it was just change in quantity over change in price,
- we would get something...it would be constant.
- But we saw very very different results.
- When you look closely at these,
- so let's focus on this region between A and B right over here,
- we had a $1 change in price.
- Our $1 change in price was on a relatively large base,
- our price was already high.
- Remember we used to figure out the % change,
- we use a dollar over the average,
- the average of our 2 points.
- so we don't do $1 over 9
- because then we would have a different elasticity
- when we went from A to B
- then when we went from B to A.
- A dollar over 9 versus a dollar over 8
- would give you 2 different percentages.
- Instead we say a dollar over eight and a half.
- So this per price % change was in the teens
- while this quantity % change is going to be with 67%
- 2 over an average quantity of 3
- in this region right over here.
- So you had a relatively large,
- actually quite large % change in quantity
- over relatively small % change in price.
- 67% over something that's in,
- roughly in the mid-teens percentage.
- And so that's why the absolute value of our elasticity of demand
- was a relatively large number.
- If you don't think about the absolute value,
- you get a negative number
- because this is a downward sloping line.
- But if you focus on the absolute value,
- it's a - the magnitude of it- is a relatively large number,
- a relatively large % change in quantity
- relative to your % change in price.
- And it all comes out of, your quantities are low here.
- So if you move 2 on a low base,
- you are going to have a large % change in quantity
- and your prices are relatively high here.
- So a change in 1 isn't going to be that large of a percentage.
- But what you have,
- when your absolute value of your elasticity of demand
- is greater than 1, like it is right over here,
- so when your absolute value of your elasticity of demand
- is greater than 1,
- it's usually called, at this point in the curve,
- is ELASTIC or generally elastic. So this is elastic.
- You get some nice % movements in quantity
- for given % change in price.
- Then when you go over here, our prices have gone -
- our prices are lower
- when we are in this region between C and D.
- So that dollar difference is going to be
- a larger % change in price
- and our quantities are higher,
- so that $2 change is going to be a lower change in quantity,
- and actually end up being the same thing,
- because you have a dollar change in price
- over an average base of 5, right?
- The average between 5.50 and 4.50 is 5.
- So if you have a 20% change in price, a 20% drop in price,
- and you have a 20% increase in quantity -
- a 20% increase in quantity.
- So let me write, this isn't the teens over here,
- my writing fitting is too small so I won't do that.
- So you have a 20% change in price
- and a 20% increase in quantity.
- That's 20% because you have 2 over the average here.
- 2 over 10, so 20% increase.
- So that's why your elasticity of demand or
- the magnitude of your elasticity of demand is exactly 1.
- And if your magnitude of your elasticity of demand is exactly 1,
- we say that you have UNIT ELASTICITY at that point,
- And then finally if you go all the way down here,
- our prices end up being quite low -
- our prices are quite low
- so a dollar change is actually a huge % price change, right?
- Our average base here is $1.50 in this region right over here.
- And so a dollar over a $1.50.
- It's a huge, it's actually a 67% change in price.
- 67, yep that's right. yeah $1 is a 2/3 change in price.
- it's a huge % change in price.
- But once again now our quantity is much larger
- so $2 increase isn't that large of a change in quantity.
- So you have a smaller % change in quantity
- over a large % change in price.
- So that just means you're relatively inelastic.
- You are not getting a lot of change in quantity
- for the magnitude of your change in price.
- So if your -
- If the magnitude of the elasticity of demand
- is less than 1 over here,
- we call that either relatively inelastic or just inelastic.
- So I'll leave you there in this video,
- and just I want you to really kind of internalize
- what we're doing here, especially with the maths.
- And especially understanding why the elasticity is changed here.
- Get you thinking in terms of percentages.
- And also make you, hopefully you'll appreciate
- why we're taking the average of these 2 points.
- When we find the denominator for the percentages
- instead of just taking 1 of the 2 points,
- we get the same elasticity of demand
- either direction we go in.
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