- 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
Perfect inelasticity and perfect elasticity of demand
Perfect inelasticity refers to a situation in which the quantity demanded does not change at all, regardless of the price. Perfect elasticity refers to a situation in which the quantity demanded is extremely sensitive to changes in price, with even a small change in price leading to a large change in quantity demanded. Created by Sal Khan.
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- At time3:20, |%change P|=1.3 from $5 to $1, not 1.6. Average price should be $3, not $2.50 (Regardless of |%change Q|=0). Is this correct?...(17 votes)
- Yeah, I just watched that too and thought, oh no, I have lost my mind and don't know how to calculate averages. It should be 1+5/2 giving an av of 3. Shouldn't it????!!!! I hope so, other wise I may as well just quit trying to learn this and get a job as a bin man.(23 votes)
- I might be wrong. But i think i found a problem with the vending machine example. If the price of the left vending machine went down to $.99, you might still have people who prefer to use the one on the right for three reasons that i can think of. one They might be in a hurry and just don't notice the difference. Two they might just have some preference to the one on the right. And three they might not want to deal with an extra penny, or perhaps some OCD kicks in and they just prefer a more even number. Although there still may be more people who will go the Franklin way and say "a penny saved is a penny earned". but I do not think that a one cent decrees in price calls for a complete 100% increase in demand. I dont have any thing to prove this, its just my opinion.(6 votes)
- Introductory economics tends to assume rational actors with perfect information. No rational actor would willingly pay more when he or she doesn't have to, and perfect information means that he or she would not mistakenly miss the cheaper machine. You will experience imperfect information and irrationality as you move into higher econ courses.(39 votes)
- Hey first off thank you so much for making these videos. Without question, you have been the person to make figuring out elasticity clear for me and I was a bit worried with my mid-term coming up this Wednesday.
I looked through the questions and did not find answers to the remaining situation and wanted to just ask if what I did was correct so that I know I have figured out how to do this properly.
So at9:00I decided to try the change going from $1.00 to $0.99 (-0.01 in P) and 100 Q to 200 Q (+100 in Q). These are the last two steps:
(100/150) * 100 / (-0.01/0.995) * 100 =
2/3 * (0.995/0.01)=
2/3 * 99.5 =
Is 66.33 the correct answer?
Thank you so much for all your hard work, you are part of the reason if I hypothetically do well Wednesday!(10 votes)
- Yes, you are indeed right! You have got the idea of percent change down.(6 votes)
- Assuming Insulin doesn't expire for a long time (say 2 years, I don't really know when it expires) then in that case wouldn't people be inclined to purchase more Insulin at that time because it would save them money. It's like when you have a sale. People buy more at that time just because prices are lower, irrespective of whether they are actually going to use it at that particular time.(5 votes)
- I thought this originally as well but Sal answers this question right away. He clarifies that we are looking at this scenario in terms of ceteris paribis (all other factors remain constant.) So we assume that there is no change any of the factors of demand (such as change in expected price) and we are only looking at changes in price, which causes a change in quantity demanded.
Hope this helps(10 votes)
- I'm a little confused by the perfect elasticity line. Shouldn't it be a DOT, rather than a horizontal line? In this example, no matter the damand of quantity, it can only sell a 100 for a dolar.(5 votes)
- A better example of something with perfect elasticity is money itself.
If I offer to sell $100 notes for the price of $100 or greater, nobody would bother buying any – it would just be a waste of their time. However, if I offered to sell $100 notes for the price of $99.99, then some smart people would work out that they can make a lot of free money by buying my notes and selling them back to me to buy more, etc - demand would become theoretically infinite!(5 votes)
- Is perfect elasticity the same as unit elasticity?(3 votes)
- No, the intuition (for me at least) is following:
UNIT: if you double the price, the quantity you can sell drops to one half. If you cut your price to one half, you are able to sell twice as much. The change is proportional to your action.
PERFECT: No matter how little you lower the price, your sells will skyrocket through the roof and no matter how little you increase the price, you are not able to sell anything. Even the slightest action you make causes biggest possible change.(10 votes)
- Aside from being a need for survival and having less substitute what else would be a reason for a product to be inelastic?(3 votes)
- Think of brands for example. If consumers are convinced one brand is much better than the other, they are more likely to buy the brand they like, even if its price is higher.
Income can also affect the elasiticity of demand. If one gets used to a given good or service and he/she is rich enough to hold the price negligible he/she will be more likely to buy the good or service even if the price went up.
Time can also be a factor, but that is due to the fact that on the lung run it is easier to find substitutes. If the price of fuel went up, more and more people would find another ways of transportation in the long run, but tomorrow, they still would buy the amount of fuel they usually do.(4 votes)
- So basically in simplified form, with perfect inelasticity, no matter what the price is, the demand will always remain the same?(2 votes)
- Yes. The demand curve is perfectly inelastic, which means it it has a slope of 0. No matter what the price is (within reason), the consumer will still buy the product.(4 votes)
- What types of markets are more or less elastic?(2 votes)
- The luxury market is more elastic since you still can live even you can not afford an LV bag and people will buy more luxuries when there is a discount.
Bread market is less elastic because you need to eat bread every day.(3 votes)
- we know that daily can of soda raises diabetes risk, so how does that reflect on elasticity of demand?(2 votes)
- Great question. Elasticity of demand is usually just comparing what happens to demand when a goods price is changed. For example, with a can of soda, you can use elasticity to measure what would happen to demand if you raised the price (say you charged $1.25 instead of $1.00 for instance).
A good that also poses a health risk, like you mentioned, will affect the "overall demand" rather than the "elasticity of demand".
Imagine if yesterday no one knew soda was unhealthy, and then today, everyone found out. Some people might ignore/discard the news, but certainly some might heed the warning. The price may have stayed the same ($1.00) but the "overall demand" would have gone down as fewer people may want to risk their health.(2 votes)
To get a better intuition for the price elasticity of demand, I thought I would take a look at some of the more extreme cases and think about what types of elasticities of demand we would see. So this right over here is a vial of insulin. Many diabetics, not all diabetics, but many diabetics need to take insulin daily. They need to inject it in order to maintain their blood sugar level. If they don't do it, bad things will happen to their body. And they might even prematurely die if they don't take their insulin on time. So let's think about what the elasticity of demand might look like for something like insulin. So in one column, I'll put price. And in the other column, I will put quantity. So let's say that insulation right now is going for $5 a vial. And we have a group of diabetics who need insulin. And they're all going to buy the insulin they need. And let's say, in this group, that turns out to be 100 vials per week. So this is in vials per week. Fair enough, that's exactly what they need to do to maintain their insulin. Now, what happens if the price changes? What happens if the price were to go down? Let's say the price were to go down to $1. Well, what would the quantity be? Well, they're not going to buy any more insulin. They're going to buy just what they need in order to maintain their diabetes. And remember, we're holding all else equal. We're not assuming any change in expectations of price. They expect price go up or down or anything like that So in this case, they'll still just by 100 vials. Now, what happens if the price went up a ton? And what happens if the price went to-- what happens if we went to $100 a vial. Well, it would be hard for them. But they need it to survive. So it's going to squeeze out any other expenses that they need to spend money on. And so they still will buy 100 vials a week. And so you could keep raising price, within reason. And they would still buy the same quantity. Obviously, if you raise it to $1 billion, then they would just wouldn't be able to afford it. But within reason, they're going to buy 100 vials per week, no matter what the price is. So this is an example of perfect inelasticity. Another way, so if you think of the physical analogy that we talked about with elasticity. It's like a brick. It doesn't matter how much, within reason once again, any amount of force pulling or pushing that a human could put on a brick, it's not going to change. It's not going to deform the brick in any way. And likewise, any change in price within reason, within reason here, isn't going to change the demand in any way. It's perfectly inelastic. And if you want to do the computation, you could look at inelas-- you could figure out the demand elasticity for, let's say, when you're going from a price of $5 to $1. So the price went down by 4. And the quantity changed by 0. So your percent change in quantity, so delta percent-- I'll write it-- percent change in quantity is equal to 0. And then, your percent is going to be over your percent change in price if you use the averaging method. It was-- it would be going down by 4 over an average of 250. It'll be a fairly large number. But at 0 over anything is still going to be 0. So it doesn't matter what that thing is over here. Your elasticity of demand in this situation is 0. And if you wanted to see what this demand curve would look like, let's plot it. So this right over here is my price axis. And that is my quantity axis. And so no matter what, let's say this is a quantity of 100 of vials per week. That's true when the price is $5. So that's true in the prices $5. They're going to demand 100 vials a week. That's true when the price is $1. They're going to demand 100 vials a week. And that's true, if the price is $20 or $100 or whatever. They're going to demand 100 vials a week. And so a perfectly inelastic demand curve would look like this. It is a vertical line. It doesn't matter what price you pick. The quantity demanded is always going to be the exact same thing. Now, let's go to another extreme. So this is perfectly inelastic. You can imagine. Well, what is perfectly elastic. Something that changes a lot if you have a small percentage change in price. And to think about that, let's look at these two vending machines. And you see that they both do sell cans of Coke. That's a can of Coke there. That is can of Coke there. And let's say, starting off, the can of Coke, let's say that they cost $1 in each vending machine. And we're going to assume that this one, remember all else equal. So we're going to assume that this vending machine right over here doesn't change. Does not change. So it's just going to be consistently charging $1 for a can of Coke. And they're sitting next to each other. And it looks like they have a little coffee machine in between right over here. So let's think about the demand curve for this, for Coca Cola in this vending machine right over here. So let's think about the price and the quantity. So I'll do-- let me do price column and quantity demanded. So let's say if the price is $1. So if the price is $1, then just odds are, it's going to get about half of the sales per week. And let's say that ends up being, I don't know, let's say that ends up being 100 cans. This is in cans per week. Now what happens? And let me put some decimals here. So this is $1.00. The price is $1.00. It sells 100 cans per week. And probably this one also would also sell about 100 cans per week. Now, what happens if we have a very, very small change in price. So if we change, if we go from $1.00, instead of $1.00, we are at $0.99. What's going to happen? So this, remember, this machine right over here is not changing. This is-- we're talking-- our demand curve is for the quantity of Cokes sold from this machine. And the price was for this machine. So if this machine is even a penny cheaper. And assuming that people, there aren't lines forming and things like that, people are just always going to go to this machine. If it's easy enough, if there's no difference, they're always going to go to this machine. So this machine will be able to get, will sell all the Cokes. So it's going to sell 200 Cokes. Now, what happens if, instead of lowering the price by a penny, you raise the price by a penny. So instead of $1.00, your at $1.01. Well, now everyone's going to go to the other vending machine. They're going to say, oh, we don't-- even a penny, might as well walk to this one. Assuming everything else is equal. So then, they're going to sell 0. And so what would the demand curve look like here. Let's plot it out. So this is the price. This right over, this axis right over here is quantity. And this is in cans per week. And so this is 0. This is 100. And then, this is 200. And then this is a price of $1. That's $1. So at $1, the quantity demanded is 100 cans. Fair enough. Now, at $0.99, the quantity demanded is 200 cans. So at $0.99, the quantity demanded is 200. So $0.99 is right below that, it's 200. So it's right over there. It's like right, right, there's a little bit lower. And $1.01 a little bit over here, the quantity demanded is 0. So the demand curve here is looks something like that. So it's going to be almost horizontal. So it's going to be approaching perfect elasticity, very small changes in price end up with these huge changes, huge changes in percent quantity demanded. And I courage to work out the math to see here, that you will get a very large number for elasticity. And so something that is, this is approaching perfect elasticity. A truly perfect elasticity would be something that is a horizontal line. So in this case, so over here, our elasticity of demand-- and I'll talk about the absolute value of it, is 0. And over here, the absolute value of our elasticity of demand is infinity. '50 Because, remember, it's percent change in quantity over percent change in price. When you go from either, from one scenario to another over here, you're percent change in price is very small. It's roughly about 1% in this scenario right over here. Changing the price up or down about 1%. But then, you see your quantity is changing, depending on which one you're looking. Your quantity is changing on the order of 50% to 100%, from that 1% change in price. So you have a huge elasticity of demand here. It would be a real-- it would actually be a number. But as you can imagine, as it becomes more and more sensitive, as quantity demanded becomes more and more sensitive to a percent change in price, this curve is going to flatten out completely. And you will have an infinite, absolute value of your elasticity of demand.