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Course: Microeconomics > Unit 3
Lesson 1: Price elasticity of demand- Introduction to price elasticity of demand
- Price elasticity of demand using the midpoint method
- More on elasticity of demand
- Determinants of price elasticity of demand
- Determinants of elasticity example
- Price Elasticity of Demand and its Determinants
- Perfect inelasticity and perfect elasticity of demand
- Constant unit elasticity
- Total revenue and elasticity
- More on total revenue and elasticity
- Elasticity and strange percent changes
- Price elasticity of demand and price elasticity of supply
- Elasticity in the long run and short run
- Elasticity and tax revenue
- Determinants of price elasticity and the total revenue rule
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More on elasticity of demand
Looking a bit deeper at why elasticity changes despite having a linear demand curve. Created by Sal Khan.
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I notice from this example that when the demand is elastic, the seller makes more money satisfying all of the demand at the lower price. For instance, I'd make $32 selling four burgers at $8 apiece but only $18 selling two burgers at $9 apiece. On the other hand, when demand is inelastic, then the seller makes more money satisfying all the demand at the higher price.
Is this how elasticity works in general, or is that just a weird artifact of this example?(114 votes)
Yes, in general this is how elasticity works. A simple way of understanding the relationship between elasticity and demand is thinking in terms of the market for insulin. Insulin, a rather vital medicine for diabetics, has an almost perfectly INELASTIC demand curve for diabetics. That means that insulin consumers are bound and tethered to the price of insulin no matter how high suppliers set the price. Because insulin consumers have an INELASTIC Demand they must suffer the high prices while the(128 votes)
I understand the concept of elasticity but i'm struggling with the numbers.
From the video I assume that elasticity is not constant along the demand curve so what does that number tell us that is actually useful?
If I have a business and wanted to know whether I should increase or decrease prices how would calculating the elasticity be useful?
Wouldn't it be better to just look at the demand curve and see if it is more vertical or horizontal to make that kind of decision?(31 votes)
Lets say you sell burgers at 2$ each and people are willing to buy 6 at this price. But if you increase the price to 3$, meaning a 40% change in price, people will buy only 3 at this price, meaning 66% change in quantity. So 66/40 is greater than 1 and your demand for burgers is elastic.
That means if you change the price, the quantity will suffer even a greater change. Knowing the elasticity will help you predict how changing the price impact the quantity demanded (and therefore your revenues).(43 votes)
Would someone more thoroughly explain to me the method which sal is using to calculate % change in price or quantity? My previous experience with percentages tells me that a change in value from 2 units to 4 units represents a 100% change in the units (demanded/supplied) because the increase is 2units, which is 100% of the initial value (2units is the initial). If I told you our sales were up 100% this quarter from the last, it would be because we have sold double the quantity of units that we did in the previous quarter. Hence my confusion.(14 votes)
The mathematical method Sal is using is known as Arc Elasticity of Demand. Based on conventional mathematics, you are absolutely right when it comes to calculating percentage change. The change tends to be always with respect to the initial value (before change).
However, in Economics, this mathematical method, Arc Elasticity of Demand, where the change is respect to the averaged of the initial value (before the change change) and final value (after the change) tends to be more accurate and used widely. This is because In the market, movements along the demand curve are frequent, it could be from point A to point B, but after a few months, from point B back to point A. Using the conventional math method, would give us 2 different values as the initial value (before the change) could be point A or point B. Thus to minimise such complications, economists take the averaged of point A and B, playing little attention to which (point A or B) is the initial point.(12 votes)
Why is the concept of elasticity important? What's its use?
What does it tell us apart from the fact that -in this case- the lower the price, the higher the quantity demanded.
Also, same question about the curve representation of that fact; what does it "add"?
Thanks for your answers.(4 votes)
Assume you are a company; you should be interested if the demand for your goods is elastic or inelastic. The elasticity roughly indicates what you should try to do: (1) Sell more quantity at lower prices or (2) Sell less quantity at higher prices(9 votes)
How can you compare different elasticities of demand? For example, how could you compare the elasticity of demand for burgers (2 increase for -$1) and flowers (let's say 3 increase for -$1)?(4 votes)
If the original price and quantity sold of both burgers and flowers are exactly the same then the demand of flowers will be more elastic than burgers.
The greater the elasticity of demand as compared to another good the higher is its elasticity. For example a good having an elasticity of demand of 2 is more elastic than a good having an elasticity of demand of 1.(2 votes)
What is the difference between absolute elasticity of demand and the normal elasticity of demand?(2 votes)- one uses the negative sign and the other does not.(1 vote)
- Is there a chance that you could do a video on elasticity of supply and demand using partial derivatives to find the elasticity? We are covering in our microeconomics class partial derivatives and how to use them to determine the elasticity of demand and supply then figuring out how an increase in price will change the equilibrium quantity. Currently it makes no sense.(4 votes)
- The less responsive consumers are to a change in the price of a product(3 votes)
i can't comment (errors) let me write here..
less responsive the consumers are = quantity demanded is less responsive to the price... ? same thing... just trying to understand.(1 vote)
Could someone explain please how the % change in price and the % change in quantity demanded work? For instance, why is the change 2/3*100% if the price goes from 2 to 1. I know the formula but I can't understand why is it like this.(1 vote)
This is because Sal makes the % change in price be the change in price divided by the average of the two prices. So, when the price goes from 2 to 1, the amount the price changes is 1, and the average is 1.5. So the % change in price is 1/1.5 * 100%, which is the same thing as 2/3*100%.
You don't have to calculate % change in price that way. You can calculate them using the starting price instead of the average if you want. Sal just chose to use averages because it means the same % change in price when going either way.(4 votes)
- If a demand or supply curve has different elasticities at each given point, what do we mean when we refer to a curve as elastic or inelastic. Wouldn't all curves just be a bundle of different elasticities?(2 votes)
- Yes, so that means you must be talking about the elasticity at a particular point on the curve. Or you have a curve that resembles a flat or vertical line.(2 votes)
Video transcript
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, elasticity. 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. In...elas...tic. 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.