hey how you doing econ students this is
mr clifford welcome to ac dc econ
right now i'm going to talk about
elasticity
you already know the law demand says
there's an inverse relationship between
price and quantity so when the price
goes up for a product people buy less
and the price goes down people buy more
but the question now is
how much less or how much more do they
buy and that's the idea of elasticity
elasticity shows how sensitive
quantity is to a change in price what
happens to quantity when there's a
change in price depends a lot on the
type of product first we're going to
talk about the idea of
inelastic inelastic let's talk about
gasoline
gasoline has inelastic demand this means
when there's an
increase in the price of gasoline the
quantum mana decreases
but just a little bit so when the demand
is inelastic the quantity is
insensitive to a change in price and it
goes the other direction when the price
falls
the coin demanded goes up but just a
little bit right you don't jump in your
car and the price goes down and grab
your engine
and run stop signs that's not what you
do so when the price goes down you buy a
little bit more when the price goes up
you buy a little bit less
insensitive to a change in price the
reason for this is because products that
have inelastic demand have very few
substitutes when it comes to gasoline
there's nothing else i can put in my car
and god knows i'm not walking i'm an
american that was a joke
to all you guys who are
environmentalists i apologize i don't
want to hurt your feelings
i love trees i will hug one i love you
i love you so much in addition to having
few substitutes
gasoline is also a necessity and it has
an elasticity coefficient that is less
than one
whoa coefficients no math can't stand
math listen there's going to be a little
bit of math in microeconomics but it's
nothing crazy
one of the things you got to watch out
for is freaking out when you hear things
like coefficient
it's not that hard the elasticity of
demand coefficient is the percent change
in quantity
divided by the percent change in price
which is not hard at all all it's trying
to say is that when there's a small
change in quantity when there's a big
change in price this number is less than
one
and if it's less than one it's inelastic
demand real quick we're talking about
absolute value remember when the price
goes up the quantity always goes down so
we're talking about the absolute value
of the elasticity of demand coefficient
the point is when there's inelastic
demand the quantity is insensitive to a
change in price so what if demand is
elastic
elastic that means quantity is sensitive
to a change in price
so right here when the price goes up the
quantity increases a whole lot
and when the price goes down the coin
demand goes up a whole lot so when the
demand is elastic it means that these
products have many substitutes or their
luxuries
or they have elasticity coefficient
greater than one a big change in
quantity as a result of a small change
in price now what if the percent change
in quantity is exactly equal to percent
change in price
well that's something called unit
elastic unit elastic is the idea the
price goes up twenty percent then the
quantity goes down twenty percent
this pops out a one a one means unit
elastic what if the demand is a vertical
straight line or
something called perfectly inelastic
well that means an increase in price
has no effect on quantity quantity
doesn't change so the percent change in
quantity is zero whenever there's a
percent change in price
and so the elasticity demand coefficient
is zero that's the idea of perfectly
inelastic and if the demand curve is
horizontal where
a firm cannot change the price at all if
they change the price no one's gonna buy
that would mean that the elasticity
demand coefficient would be infinite all
this will make more sense when you see
them side by side so take a look at this
what you're looking at is five different
demand curves
perfectly inelastic relatively inelastic
unit elastic
relatively elastic and perfectly elastic
and you can see the elasticity
coefficient
is zero less than one one greater than
one and
infinite this shows you the more
substitutes a product has and the more
sensitive it is to a change of price
the greater the elasticity demand
coefficient does it make sense
bonus round one of the most important
topics you're going to see is something
called the total revenue test so this
tells you what happens to total revenue
when there's a change in price
if the demand curve is inelastic or
elastic it'll make more sense on a graph
over here on the left we have
inelastic demand right here on the right
we have elastic demand the total revenue
is the price
times the quantity it's this box right
here notice how the box on both graphs
starts exactly the same size
when supply shifts to the left that
causes the price to go up notice that on
both curves the price goes up and the
quantity goes down
remember a lot of demand is at play here
when the price goes up the quantity goes
down we're not analyzing that
what we're analyzing is the total
revenue the size of the buck so for
inelastic demand the price went up a
whole lot but quantity decreased just a
little bit
and so the size of the box got bigger
that means when the demand's inelastic
the price goes up and the total revenue
goes up
or when the price goes down the total
revenue goes down and that explains why
gas stations never have sales
right there's no reason for a gas
station to have like a half off gas sale
because they lower their price the total
revenue is not going to increase
but let's take a look at elastic demand
when the price goes up a whole lot of
people don't want to buy it and so the
size of the total revenue box gets
smaller
so when the price goes up total revenue
falls and the price goes down total
revenue goes up
that's why products that have elastic
demand will have sales all the time now
what you're going to see on a test is a
question that says
if there's a given product product x and
the price goes up and the total revenue
goes down
what must be true and the answer is it's
elastic demand right if the price goes
up and the total revenue the box gets
smaller
that's elastic demand bonus bonus round
one of the things i do to help students
understand the total revenue test is
give them this thing to do with their
hands
so if the price goes up for a product
and the total revenue goes up
i look like an i look like an i the
demand is inelastic
right price goes up total revenue goes
up the other way to look like an eyes if
price goes down and total revenue goes
down
i look like an i i'm inelastic demand if
the price goes up and total revenue goes
down
i don't look like an i i'm elastic
demand if price goes down and total
unknown goes up
i'm not an i it must be elastic demand
so this is going to help you on a test
if they say
the price goes up for a product and the
total revenue went up
you look at yourself you look like an
eye inelastic demand i hope this video
helped you understand the idea of
elasticity and the total revenue test
now make sure to subscribe and take a
look at the next video to explain
cross price and income elasticity also
check out my series of videos called
econ movies alright
until next time