Elasticity of Demand- Micro Topic 2.3

Summary

This script delves into the concept of price elasticity of demand, illustrating how the quantity demanded reacts to price changes. It explains inelastic demand with gasoline as an example, where price fluctuations have a minimal effect due to few substitutes and necessity. The script introduces the elasticity coefficient, defining inelastic demand as having a coefficient less than one. It contrasts this with elastic demand, where quantity changes significantly with price, typically associated with products having many substitutes or being luxuries. The total revenue test is highlighted, showing how total revenue changes with price in inelastic versus elastic demand. The video concludes with a mnemonic to remember these concepts, encouraging viewers to subscribe for more economic insights.

Takeaways

• 📈 The law of demand states there's an inverse relationship between price and quantity demanded.
• 🔍 Elasticity measures the sensitivity of quantity demanded to changes in price.
• 🛢️ Gasoline has inelastic demand, meaning price changes have a small effect on quantity demanded.
• 🚫 Products with inelastic demand have few substitutes and are often necessities.
• 📏 The elasticity coefficient is calculated as the percent change in quantity divided by the percent change in price.
• 🔢 An elasticity coefficient less than one indicates inelastic demand, while greater than one indicates elastic demand.
• ⚖️ Unit elastic demand means the percent change in quantity is equal to the percent change in price, resulting in an elasticity coefficient of one.
• 📉 Perfectly inelastic demand implies no change in quantity regardless of price changes, giving an elasticity coefficient of zero.
• 📈 Perfectly elastic demand is represented by a horizontal demand curve, where any price change results in zero quantity demanded, yielding an infinite elasticity coefficient.
• 💹 The total revenue test shows that for inelastic demand, an increase in price leads to an increase in total revenue, while for elastic demand, it leads to a decrease.

Q & A

What is the inverse relationship between price and quantity?

The inverse relationship between price and quantity, as stated in the script, is that when the price of a product increases, people tend to buy less of it, and when the price decreases, people tend to buy more.

What does the term 'elasticity' refer to in the context of economics?

Elasticity in economics refers to how sensitive the quantity demanded of a product is to a change in its price. It measures the responsiveness of the quantity demanded to changes in price.

Why is gasoline considered to have inelastic demand?

Gasoline is considered to have inelastic demand because it has very few substitutes and is a necessity. As a result, even when the price increases, the quantity demanded decreases only slightly.

What is the elasticity coefficient and how is it calculated?

The elasticity coefficient is calculated as the percentage change in quantity demanded divided by the percentage change in price. It indicates whether the demand is elastic (greater than 1), inelastic (less than 1), or unit elastic (equal to 1).

What does it mean if a product has an elasticity coefficient less than one?

If a product has an elasticity coefficient less than one, it indicates inelastic demand, meaning the quantity demanded is not very sensitive to changes in price.

How does the total revenue change when the demand is inelastic and the price is increased?

When the demand is inelastic and the price is increased, the total revenue (price times quantity) increases because the quantity demanded decreases only slightly, while the price increase is significant.

What is the difference between elastic and inelastic demand in terms of total revenue?

In the case of elastic demand, when the price is increased, the total revenue decreases because the quantity demanded decreases significantly. Conversely, for inelastic demand, an increase in price leads to an increase in total revenue due to the smaller decrease in quantity demanded.

What is meant by 'unit elastic' in the context of demand?

Unit elastic refers to a situation where the percentage change in quantity demanded is equal to the percentage change in price, resulting in an elasticity coefficient of exactly one.

Can you explain the concept of 'perfectly inelastic' demand?

Perfectly inelastic demand means that there is no change in the quantity demanded regardless of changes in price. The elasticity coefficient for perfectly inelastic demand is zero.

What is the 'total revenue test' and how does it relate to elasticity?

The total revenue test is a method to determine the type of demand (elastic or inelastic) by observing the effect of price changes on total revenue. If total revenue increases when the price increases, the demand is inelastic. If total revenue decreases when the price increases, the demand is elastic.