Microeconomics for Beginners - Week 4_Video 1 - Price Elasticity of Demand

Summary

This video lecture introduces beginners to the concept of price elasticity of demand in microeconomics. It explains how demand changes in response to price variations and factors influencing this elasticity. The lecture covers types of price elasticity, including perfectly elastic, relatively elastic, unitary elastic, relatively inelastic, and perfectly inelastic demand, providing real-life examples for each. Additionally, the lecture demonstrates how to calculate price elasticity and its practical significance for consumers, producers, and governments. It also discusses exceptions to the law of demand, such as GI and deblin goods, and emphasizes the importance of understanding elasticity for decision-making in economics.

Takeaways

• 😀 Price elasticity of demand (PED) measures how quantity demanded changes in response to changes in price.
• 😀 PED is calculated as the percentage change in quantity demanded divided by the percentage change in price.
• 😀 There are three main types of elasticity: price elasticity, income elasticity, and cross-price elasticity.
• 😀 The formula for PED is: PED = (ΔQ / ΔP) * (P / Q), where ΔQ is the change in quantity demanded, ΔP is the change in price, P is the initial price, and Q is the initial quantity.
• 😀 PED can range from perfectly elastic (PED = ∞) to perfectly inelastic (PED = 0).
• 😀 Perfectly elastic demand means even a tiny price change leads to zero demand, and the graph is a horizontal line.
• 😀 Relatively elastic demand means the quantity demanded changes by a greater percentage than the price change.
• 😀 Unitary elastic demand means the quantity demanded changes exactly in proportion to the price change.
• 😀 Relatively inelastic demand means quantity demanded changes by a smaller percentage than the price change.
• 😀 Perfectly inelastic demand means that price changes do not affect the quantity demanded, as seen with essential goods like salt and medicine.
• 😀 Exceptions to the law of demand include Giffen goods and Veblen goods, where demand increases despite price hikes.

Q & A

What is the objective of the video on price elasticity of demand?

The objective is to help the learner understand the concept of elasticity of demand, how to extend the price elasticity of demand, and how to interpret graphs relating to it.

How is price elasticity of demand defined?

Price elasticity of demand is the percentage change in the quantity demanded of a product due to a unit percentage change in the price of that product.

What are the three important types of elasticity of demand?

The three important types of elasticity of demand are price elasticity of demand, income elasticity of demand, and cross-price elasticity of demand.

What is the formula for calculating price elasticity of demand?

The formula for calculating price elasticity of demand is: (Delta Q / Delta P) * (P / Q), where Delta Q is the change in quantity demanded, Delta P is the change in price, P is the initial price, and Q is the initial quantity.

How is the price elasticity of demand calculated in the example given in the video?

In the example, the price increases from Rs. 10 to Rs. 12, causing a decrease in demand from 50 units to 40 units. The price elasticity of demand is calculated as: ((40 - 50) / (12 - 10)) * (10 / 50), which results in -1.

What does a price elasticity of demand value of -1 signify?

A price elasticity of demand value of -1 signifies that for a 10% change in price, there will be an exact 10% change in the quantity demanded, indicating unitary elasticity.

Can you provide a real-life scenario where price elasticity of demand is relevant?

An example is when supermarkets offer discounts on products, increasing sales due to a reduction in price. Similarly, an increase in the price of essential goods like tomatoes or onions may lead to a decrease in their demand.

What are the different types of price elasticity of demand based on its value?

Price elasticity of demand can be classified as: perfectly elastic (infinity), relatively elastic (greater than 1), unitary elastic (1), relatively inelastic (less than 1), and perfectly inelastic (0).

What is perfectly elastic demand, and how is it represented on a graph?

Perfectly elastic demand occurs when a small change in price results in a complete change in demand. It is represented as a horizontal line on a graph, parallel to the x-axis.

What are some real-life examples of goods with perfectly inelastic demand?

Examples of goods with perfectly inelastic demand include staple foods like salt and essential prescription drugs, where the quantity demanded remains constant regardless of price changes.