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AP.MICRO:

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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.