More on elasticity of demand

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More on elasticity of demand발음듣기

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What I want to do in this video is focus a little bit more on the results of the last video.발음듣기

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Make sure that they make intuitive and mathematical sense to us because something slightly strange happened.발음듣기

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We had a linear demand curve right over here, which means for any given change in price right over here.발음듣기

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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.발음듣기

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We had a $1 drop in price.....a $1 drop in price.발음듣기

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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.발음듣기

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So we had a 2 unit increase in quantity demanded.발음듣기

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This is a linear demand curve.발음듣기

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But despite the fact that for each dollar drop in price, we had the same increase in quantity demanded.발음듣기

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The slightly maybe un-intuitive thing that happened was that we had a slight, we had a different - actually very different elasticity of demand.발음듣기

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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.발음듣기

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If it was just change in quantity over change in price, we would get something...it would be constant.발음듣기

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But we saw very very different results.발음듣기

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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.발음듣기

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Our $1 change in price was on a relatively large base, our price was already high.발음듣기

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Remember we used to figure out the % change, we use a dollar over the average, the average of our 2 points.발음듣기

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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.발음듣기

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A dollar over 9 versus a dollar over 8 would give you 2 different percentages.발음듣기

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Instead we say a dollar over eight and a half.발음듣기

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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.발음듣기

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So you had a relatively large, actually quite large % change in quantity over relatively small % change in price.발음듣기

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67% over something that's in, roughly in the mid-teens percentage.발음듣기

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And so that's why the absolute value of our elasticity of demand was a relatively large number.발음듣기

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If you don't think about the absolute value, you get a negative number because this is a downward sloping line.발음듣기

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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.발음듣기

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And it all comes out of, your quantities are low here.발음듣기

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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.발음듣기

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So a change in 1 isn't going to be that large of a percentage.발음듣기

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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.발음듣기

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So this is elastic.발음듣기

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You get some nice % movements in quantity for given % change in price.발음듣기

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Then when you go over here, our prices have gone - our prices are lower when we are in this region between C and D.발음듣기

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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?발음듣기

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The average between 5.50 and 4.50 is 5.발음듣기

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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.발음듣기

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So let me write, this isn't the teens over here, my writing fitting is too small so I won't do that.발음듣기

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So you have a 20% change in price and a 20% increase in quantity.발음듣기

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That's 20% because you have 2 over the average here.발음듣기

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2 over 10, so 20% increase.발음듣기

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So that's why your elasticity of demand or the magnitude of your elasticity of demand is exactly 1.발음듣기

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And if your magnitude of your elasticity of demand is exactly 1, we say that you have UNIT ELASTICITY at that point, elasticity.발음듣기

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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?발음듣기

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Our average base here is $1.50 in this region right over here.발음듣기

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And so a dollar over a $1.50.발음듣기

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It's a huge, it's actually a 67% change in price.발음듣기

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67, yep that's right. yeah $1 is a 2/3 change in price.발음듣기

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It's a huge % change in price.발음듣기

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But once again now our quantity is much larger so $2 increase isn't that large of a change in quantity.발음듣기

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So you have a smaller % change in quantity over a large % change in price.발음듣기

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So that just means you're relatively inelastic.발음듣기

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You are not getting a lot of change in quantity for the magnitude of your change in price.발음듣기

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So if your -발음듣기

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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.발음듣기

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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.발음듣기

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And especially understanding why the elasticity is changed here.발음듣기

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Get you thinking in terms of percentages.발음듣기

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And also make you, hopefully you'll appreciate why we're taking the average of these 2 points.발음듣기

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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.발음듣기

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