Price Elasticity of Demand: What Is Elasticity? | Part 1

Summary

This video script explores the concept of price elasticity of demand, which measures how sensitive consumers are to price changes. It explains the difference between elastic, inelastic, and unit elastic demand, using examples such as basketball shoes and natural gas. The script introduces the law of demand and clarifies that while some goods have highly responsive demand to price changes (elastic), others have less responsive demand (inelastic). The importance of understanding elasticity is highlighted through practical examples and a pop quiz to test the viewer's grasp of the concept.

Takeaways

• 😀 Elasticity refers to how responsive consumers are to a change in the price of a good or service.
• 😀 The law of demand suggests that as the price of a good rises, the quantity demanded decreases, and vice versa.
• 😀 Price elasticity of demand measures how much the quantity demanded changes relative to a change in price.
• 😀 A good is considered price elastic if the quantity demanded changes significantly in response to price changes.
• 😀 A good is considered price inelastic if the quantity demanded changes little when there is a price change.
• 😀 For elastic goods, the percentage change in quantity demanded is greater than the percentage change in price.
• 😀 For inelastic goods, the percentage change in quantity demanded is less than the percentage change in price.
• 😀 A good is considered unit elastic if the percentage change in price and the percentage change in quantity demanded are equal.
• 😀 Example of elastic demand: A 10% price increase leads to a 20% decrease in quantity demanded.
• 😀 Example of inelastic demand: A 10% price increase leads to only a 5% decrease in quantity demanded.
• 😀 Factors such as availability of substitutes, necessity of the good, and time can affect a good's elasticity.

Q & A

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

In economics, 'elasticity' refers to the responsiveness or sensitivity of consumers to a change in the price of a good or service. It measures how much the quantity demanded of a good changes when its price changes.

What is the law of demand and how does it relate to price elasticity?

The law of demand states that as the price of a good or service rises, consumers tend to buy less of it, and as the price falls, they tend to buy more. Price elasticity of demand measures how much the quantity demanded responds to these price changes.

How does price elasticity of demand differ from the simple law of demand?

While the law of demand explains that quantity demanded moves in the opposite direction of price changes, price elasticity of demand goes further by quantifying how much the quantity demanded changes relative to the price change, offering a measure of consumer responsiveness.

What does it mean when a good has elastic demand?

A good is said to have elastic demand if the quantity demanded changes significantly in response to a price change. In other words, the percent change in quantity demanded is greater than the percent change in price.

What does it mean when a good has inelastic demand?

A good has inelastic demand when the quantity demanded does not change significantly when the price changes. The percent change in quantity demanded is less than the percent change in price.

What is an example of elastic demand, and why is it considered elastic?

An example of elastic demand is when the price of a good increases by 10% and the quantity demanded decreases by 20%. The demand is elastic because the quantity demanded changes more than the price change.

What is an example of inelastic demand, and why is it considered inelastic?

An example of inelastic demand is when the price of natural gas increases by 10%, and the quantity demanded only decreases by 5%. The demand is inelastic because the quantity demanded changes less than the price change.

What does 'unit elastic' mean in terms of demand?

Unit elastic demand occurs when the percentage change in quantity demanded is exactly equal to the percentage change in price. For example, if the price increases by 20% and the quantity demanded decreases by 20%, the demand is unit elastic.

Why are black high-top basketball shoes considered elastic in the example provided?

Black high-top basketball shoes are considered elastic because the price increases by 10% but the quantity demanded decreases by 20%. Since the percentage change in quantity demanded is greater than the percentage change in price, the demand is elastic.

What are some factors that determine whether demand for a good is elastic or inelastic?

Several factors influence the elasticity of demand, including the availability of substitutes, the necessity of the good, the proportion of income spent on the good, and the time period over which the price change occurs.