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AP®︎/College Microeconomics
Course: AP®︎/College Microeconomics > Unit 2
Lesson 3: Price elasticity of demand- Introduction to price 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
- Determinants of price elasticity and the total revenue rule
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Determinants of elasticity example
Walk through the logic of determining what kind of good has the most elastic demand in this video.
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- can cigarettes be price elastic? as a decrease in price of cigarettes would greatly increase the quantity of cigarettes demanded(1 vote)
Video transcript
- [Instructor] We are asked, "which of the following describes a good "that is likely to have
the most elastic demand?" Choose one answer. So pause this video and
see if you can answer that. All right, so the first
choice right over here, they talk about "a luxury
with many substitutes." So we already talked about, when you're dealing with substitutes, if there's a lot of substitutes, that makes the quantity demanded
very sensitive to price. So this would make it more elastic to have many substitutes. More elastic. And then the fact that it's a luxury. It's not something that people need, this would also make quantity more sensitive to price, generally. So we would also say more elastic. So this is looking like a good candidate, but let's check the other options here. "A necessity with few substitutes." Well, this is the opposite. If it's a necessity, this
would be more inelastic, or less elastic. Less elastic. And few substitutes, if you have a change in
price for that thing, people say, well, I still
have to buy that thing, I can't substitute it with other things. This would also be less elastic. And remember, we're looking
for the most elastic demand, so we can rule this one out. "A broadly defined good such as food." Well, we just talked about that. If we're talking about food, and there's a price change in food, well, we need food, so our quantity demanded
might, would not likely change, or our percent change in quantity would not likely be that much. This would be fairly inelastic. Rule that one out. "Goods that make up a
small share of the budget." Well, this goes back to
that example with bubblegum. If bubblegum goes from
25 cents to 30 cents, we might not care so much. Versus if a car goes
from $25,000 to $30,000. So the small things that we might not care about price changes so much, if we don't care so much
about price changes, that would imply less elasticity, so that definitely would not
be the most elastic demand. "Goods that have to be bought "under a short time constraint." Well, a good example is that it's raining and people need umbrellas right now, in, you know, the next five, 10 minutes, and there, they wouldn't necessarily be so sensitive to price, so this is going to be less elastic, and so once again, we would rule this out. If we had a long time frame, well, then people might be able to shop around for substitutes and then things might get
a little bit more elastic. They would be more sensitive to price. So we definitely like, in
this scenario, choice A.