- [Instructor] In other videos we have already started
talking about the price elasticity of demand,
and what we're gonna 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 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 might look something like that,
so I'll write that as high,
high elasticity
elasticity.
And low elasticity would be that your
percentage in quantity does not change much
depending on your percent change in price.
So low elasticity, the closer and closer
we get to a vertical curve, the lower our elasticity,
so 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 now 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, timeframe, 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 substitutes.
And we can 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, McIntosh 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 the 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,
would be very sensitive to price.
And you could go the other way around
if you have 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 timeframe, how does that affect elasticity?
Well, imagine that you are selling umbrellas
and it is raining right now.
So for thinking about a short timeframe,
while it is raining, then you could probably
raise the prices on umbrellas a good bit,
and assuming you have good foot traffic,
a lot of people are probably going to be willing
to pay that price, and so in a short timeframe,
in a short,
short timeframe,
things tend to be less elastic.
Less elastic.
But over a longer timeframe,
so longer timeframe, 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 timeframe, 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
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 bubble gum, and let's say bubble gum right now
is 25 cents, and if it were to go to 50 cents,
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
for most people's pocket books.
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 here, so high share,
high share of income,
so let's say we're talking about
an automobile, and if people are already spending
20% or 30% of their income on that automobile
and that automobile were to double,
the cost of that versus the gum ball drop,
the 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?
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, really bad things
are going to happen.
If they were to raise the price of insulin
by 20, 30, 40%, 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 gonna 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 will say, I might not need
that gold tiara anymore, it's really not gonna 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 isn't
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 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 here?
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 talking 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 apples go up,
people say well maybe I'm gonna go buy some pears,
or bananas, or something else instead of the apples,
and so you're gonna 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 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 price elasticity of demand.