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Video transcript

in other videos we have already started talking about the price elasticity of demand and what we're going to do in this video is think about the factors that might drive the price elasticity of demand in a given market to be more or less elastic so one could say that we're gonna think about the determinants of the price elasticity of demand now before we even talk about those determinants or those factors let's just give ourselves a little bit of a review of what an elastic or an inelastic market might look like so let me draw my price and quantity axes that we are pretty familiar with at this point so quantity on the horizontal axis price on the vertical axis and remember price elasticity of demand is percent change in quantity for a given percent change in price so a high elasticity would say that you have a large percent change in quantity for a given percent change in price so high elasticity would look something like this it would be a flatter demand curve so this one it might maybe look something like that so all right that is high high elasticity elasticity and low elasticity would be that your percent change in quantity does not change much depending on your percent change in price so a low elasticity the closer and closer we get to a vertical curve the lower our elasticity so a low elasticity would look something like that a low elasticity demand curve low elasticity elasticity in other videos we even think about a perfectly inelastic market in which case you would have a vertical demand curve but let's not think about the factors that might lead us to be closer to the high elasticity case or closer to the low elasticity case so the factors that economists will generally point to are substitutes time frame income share whether the market we're talking about is about a luxury or necessity and the narrowness of a market so let's start with substitutes so let's imagine first a world where there are many substitutes for the good or service that we're talking about many substance and we could think of examples in our heads for markets of goods or services where there are many substitutes let's say it's the market for Fuji apples well the other substitutes are the other types of apples out there Macintosh apples and Red Delicious apples and all of those and so for a given percent change in price would you expect the percent change in quantity demanded of Fuji apples to change dramatically well if there are many substitutes and only the Fuji apples say get a lot more expensive then people will go to the substitutes they're more likely to go to the Red Delicious or the McIntosh apples so when you have many substitutes that tends to lead to more elasticity more elasticity people quantity I guess you could say it would be very sensitive to price and you could go the other way around if you have a few substitutes few substitutes well then even if the price changes a little bit or even if it changes a lot people say well I don't know what I could substitute that with so they might still buy a reasonably similar quantity so this would be less less elastic less elastic now what about time frame how does that affect elasticity well imagine that you are selling umbrellas and it is raining right now so if we're thinking about a short time frame while it is raining then you could probably raise the prices on umbrellas a good bit and assuming that you have good foot traffic a lot of people are probably going to be willing to pay that price and so in a short time frame in a short short time frame things tend to be less elastic less elastic but over a longer time frame it's a longer time frame people might say hey you're trying to really rip me off with those umbrellas and take advantage of me I can go someplace else and find umbrellas I could go online or whatever else and so there people tend to be more sensitive to price on the longer time frame they can find their substitutes going back to the previous determinant and so things tend to be more elastic so once again you could view elasticity as as how sensitive quantity is to price so next income share so let's first think about something that makes up a very small percentage of your income say bubblegum and let's say bubblegum right now is 25 cents and if it were to go to 50 Cent's that would likely reduce the quantity demanded but it might not be so significant because going from 25 cents to 50 cents isn't gonna make a big difference on for most people's pocketbooks so in general the lower the income share lower share of income the less elastic the less elastic that market is going to be but imagine something that is a high share of income so let's say we're talking about let me just write it here so high share I share of income so let's say we're talking about an automobile and if people already spending 20 percent or 30 percent of their income on that automobile and that automobile were to double the cost of that versus the gumball drop or what a bubble gum well then people just wouldn't even be able to demand the same quantities that they were able to before because their income just can't support it they have other things to spend that money on that extra money because their incomes just can't support it so they will be highly sensitive to changes in price so high sensitivity to changes in price more elastic now what about luxuries versus necessities well let's start with necessities if this is something that you absolutely need then even if the price were to go up a good bit as long as you can still afford it you might still go for that thing so for example let's say there's some medicine let's say you're a diabetic and you need insulin if you don't get insulin and really bad things are going to happen if they were to raise the price of insulin by 20 30 40 percent assuming that you could still afford it you would still buy the same quantity because you need that insulin and so if something is a necessity necessity you're going to be less price sensitive the quantity is going to be less sensitive to price and so you're going to be less elastic but if something's a luxury if we're talking about you know gold tiaras and the price of gold were to go up dramatically well then a lot of people say oh I I might not need that gold TR anymore it's really not going to make a big difference in my life so in general luxuries luxury will be associated with more elasticity now there could be exceptions if something is in kind of the ultra luxury category and if maybe the price were to go up maybe the people buying it it's a very low share of their income and maybe it's a brand that at least the people beside buying it feel that there's no substitute for it well then maybe it might not be as sensitive but we're talking about in broad generalities now the last factor that is sometimes talked about is the narrowness of the market now what are we talking about there so for example we could be talking about the market market for apples or you could talk about the market market for food which of these markets they're kind of both describing food but which one is more narrow yes apples are a subset of all food and so if we're going about the market for apples the narrower situation so if we're talking about the narrower narrower market you tend to have more substitutes so if the price of Apple's go up people say well maybe I'm going to go buy some pears or bananas or something else instead of the apples and so you're going to be more quantity will be more sensitive to changes in price and so you're gonna have more elasticity but if you have a broader definition of your market the market for food well now the food looks a lot more like it's a necessity there are very few substitutes for food if I stop eating food well I it's not like I can eat you know change or just live off of air or whatever else there's very there's really no substitutes for food it is an absolute necessity so the broader the market definition so the broader the market we tend to be dealing with a less elastic less elast less price elasticity of demand
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