Perfect inelasticity and perfect elasticity of demand | Microeconomics | Khan Academy

Summary

This script explores the concept of price elasticity of demand through two extreme examples: insulin and vending machine soda. Insulin, essential for diabetics, exhibits perfect inelasticity, where demand remains constant despite price changes. Conversely, soda in vending machines shows near-perfect elasticity, with demand highly sensitive to small price variations. The discussion includes calculations of elasticity and visual representations through demand curves, illustrating the significant impact of price on consumer behavior.

Takeaways

• 💊 The price elasticity of demand for insulin is an example of perfect inelasticity because diabetics need it to survive, regardless of the price.
• 📉 In the case of insulin, a decrease in price from $5 to $1 does not change the quantity demanded, which remains at 100 vials per week.
• 📈 Conversely, even if the price of insulin increases significantly, the quantity demanded stays the same at 100 vials per week, demonstrating inelastic demand.
• 🧱 The concept of perfect inelasticity is likened to a brick, which does not deform under reasonable force, similar to how insulin demand does not change with price.
• 📊 The demand curve for a perfectly inelastic good, like insulin, is a vertical line on a graph, indicating constant quantity demanded at all price levels.
• 🥤 The price elasticity of demand for a can of Coke from vending machines is an example of perfect elasticity, where a small change in price can lead to a significant change in quantity demanded.
• 📉 If the price of a can of Coke in one vending machine is reduced by a penny to $0.99, the quantity demanded can double to 200 cans per week.
• 📈 If the price of a can of Coke is increased by a penny to $1.01, the quantity demanded drops to zero as consumers switch to the cheaper alternative.
• 📊 The demand curve for a perfectly elastic good, like the can of Coke in the example, is almost horizontal, showing that quantity demanded is highly sensitive to price changes.
• ∞ The elasticity of demand for the Coke example approaches infinity, indicating that even a small percentage change in price results in a large percentage change in quantity demanded.

Q & A

What is the price elasticity of demand?

The price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price.

What is an example of a good with a perfectly inelastic demand?

Insulin is an example of a good with a perfectly inelastic demand because diabetics need it to survive, and they will continue to purchase the same quantity regardless of the price.

How does the demand for insulin change when the price changes?

The demand for insulin does not change with price changes; diabetics will still purchase the same quantity needed to maintain their health.

What is the elasticity of demand for insulin when the price is reduced from $5 to $1?

The elasticity of demand for insulin in this scenario is 0, as the quantity demanded remains constant despite the price decrease.

What is perfect inelasticity in the context of demand elasticity?

Perfect inelasticity refers to a situation where the quantity demanded does not change at all, no matter how much the price changes, within a reasonable range.

What is the physical analogy used to describe perfect inelasticity?

The physical analogy for perfect inelasticity is a brick, which does not deform or change shape regardless of the force applied.

What does a perfectly inelastic demand curve look like?

A perfectly inelastic demand curve is a vertical line on a graph, indicating that the quantity demanded remains constant at all price levels.

What is an example of a good with a perfectly elastic demand?

A good with a perfectly elastic demand could be a product where consumers are extremely sensitive to price changes, such as a vending machine selling a product that has an identical alternative nearby.

How does the demand for a product change when it's priced slightly lower than an identical alternative?

In the case of perfect elasticity, if a product is priced slightly lower than an identical alternative, all consumers will switch to the cheaper option, leading to a significant increase in quantity demanded.

What does a perfectly elastic demand curve look like?

A perfectly elastic demand curve is a horizontal line on a graph, indicating that even a small change in price can lead to an infinite percentage change in quantity demanded.

What is the elasticity of demand when a product's price is increased by a small amount, causing all consumers to switch to an alternative?

The elasticity of demand in this scenario is infinite, as a very small percentage change in price leads to a 100% change in quantity demanded.

Why does the demand for a product in a vending machine example change dramatically with a small price change?

The demand for a product in a vending machine changes dramatically with a small price change because consumers are highly sensitive to price differences and will choose the cheaper option if it's available.

Outlines

00:00

💊 Perfect Inelasticity of Insulin Demand

The paragraph discusses the concept of price elasticity of demand using the example of insulin, a critical medication for diabetics. It explains that insulin is a necessity for many diabetics to maintain their blood sugar levels, and without it, they could face severe health consequences or even death. The speaker explores the demand elasticity by hypothesizing a scenario where the price of insulin changes but the quantity demanded remains constant at 100 vials per week, regardless of the price. This is because diabetics need a fixed amount of insulin to survive, and price changes do not affect their consumption. The elasticity of demand for insulin is described as perfectly inelastic, akin to a brick that does not deform regardless of the force applied. Mathematically, the elasticity is calculated as the percentage change in quantity demanded (which is zero) over the percentage change in price, resulting in an elasticity of 0. The demand curve for insulin is depicted as a vertical line, indicating that the quantity demanded does not vary with price.

05:00

🥤 Perfect Elasticity of Coke Demand in Vending Machines

This paragraph examines the opposite extreme of demand elasticity, using the example of vending machines selling cans of Coke. It sets up a scenario where two vending machines side by side initially sell Coke at the same price of $1.00 per can. The speaker then explores the impact of a small change in price on the quantity demanded. If one machine lowers its price to $0.99, it captures all the sales, doubling the quantity demanded to 200 cans per week. Conversely, if the price is raised to $1.01, the other machine sells all the cans, and the first machine sells none. This demonstrates a highly elastic demand where a minor price change results in a significant shift in quantity demanded. The demand curve is almost horizontal, approaching perfect elasticity, with the elasticity of demand being infinite in this scenario. The speaker encourages the audience to work out the math to understand how a small percentage change in price leads to a large percentage change in quantity demanded, highlighting the extreme sensitivity of demand to price changes in this example.

Keywords

💡Price Elasticity of Demand

Price elasticity of demand measures how the quantity demanded of a good responds to changes in its price. It is a fundamental concept in economics that helps to understand consumer behavior. In the video, the concept is used to explain the extremes of demand elasticity, using insulin as an example of a good with inelastic demand and vending machine Coca Cola as an example of elastic demand.

💡Insulin

Insulin is a hormone that regulates blood sugar levels, and it is a critical medication for many diabetics. The video uses insulin to illustrate a product with perfectly inelastic demand, as diabetics need it regardless of the price due to its necessity for survival.

💡Perfect Inelasticity

Perfect inelasticity refers to a situation where the quantity demanded of a good does not change at all when the price changes. This is exemplified in the video by the insulin scenario, where diabetics will buy the same amount of insulin regardless of the price because they need it to maintain their health.

💡Vending Machines

Vending machines are used in the script to demonstrate a situation of perfect elasticity. The video describes a scenario where a small change in price of Coca Cola in one vending machine can lead to a complete shift in demand to the other machine, showing how sensitive the quantity demanded is to price changes.

💡Coca Cola

Coca Cola is used in the video as an example of a product with potentially elastic demand. The script discusses how a small price change in vending machines can significantly affect the quantity of Coca Cola sold, indicating a high responsiveness to price changes.

💡Perfect Elasticity

Perfect elasticity is a theoretical concept where the percentage change in quantity demanded is infinite in response to a small change in price. The video uses the example of Coca Cola in vending machines to illustrate how demand can be highly sensitive to price changes, approaching perfect elasticity.

💡Price Changes

Price changes are central to the discussion of elasticity in the video. The script explores how different goods react to price changes, with insulin showing no change in quantity demanded and Coca Cola showing a significant change, highlighting the difference between inelastic and elastic demand.

💡Quantity Demanded

Quantity demanded refers to the amount of a product that consumers are willing and able to purchase at a given price. The video uses this term to compare the effects of price changes on the demand for insulin and Coca Cola, demonstrating the concept of elasticity.

💡Necessity vs. Non-necessity Goods

The video contrasts necessity goods, like insulin, which people need regardless of price, with non-necessity goods, like Coca Cola, where demand is more sensitive to price changes. This distinction helps to explain why some goods have inelastic demand while others have elastic demand.

💡Economic Concepts

Economic concepts are the theoretical frameworks used to understand economic behavior. The video discusses price elasticity of demand, which is a key economic concept, to explain consumer behavior in response to price changes for different types of goods.

💡Vertical Demand Curve

A vertical demand curve represents a situation where the quantity demanded does not change with price, indicating perfect inelasticity. The video uses this concept to describe the demand curve for insulin, which remains constant regardless of the price.

💡Horizontal Demand Curve

A horizontal demand curve is a theoretical representation of perfect elasticity, where a small change in price leads to an infinite percentage change in quantity demanded. The video suggests that the demand for Coca Cola in vending machines approaches this scenario, where price changes significantly affect the quantity demanded.

Highlights

Exploring extreme cases to understand price elasticity of demand.

Insulin as an example of a necessity with extreme price inelasticity.

Diabetics' need for daily insulin injection regardless of price.

Hypothetical scenario of insulin priced at $5 per vial with a fixed demand.

Price reduction to $1 does not increase quantity demanded for insulin.

Price increase to $100 still results in the same quantity demanded due to necessity.

Concept of perfect inelasticity of demand for life-sustaining goods like insulin.

Physical analogy of perfect inelasticity compared to a brick's resistance to deformation.

Calculation of price elasticity of demand for insulin when price drops from $5 to $1.

Demand elasticity of 0 for insulin, indicating perfect inelasticity.

Visual representation of a perfectly inelastic demand curve as a vertical line.

Contrasting insulin with a perfectly elastic good: a can of Coke in a vending machine.

Price sensitivity in vending machine sales: a penny difference leads to all or no sales.

Demand elasticity approaching infinity for small price changes in competitive goods like Coke.

Graphical illustration of a demand curve approaching perfect elasticity as almost horizontal.

Theoretical concept of perfect elasticity with an elasticity of demand equaling infinity.

Practical implications of understanding elasticity for pricing strategies in different markets.

Transcripts

To get a better intuition for the price elasticity of demand,

I thought I would take a look at some of the more extreme cases

and think about what types of elasticities of demand

we would see.

So this right over here is a vial of insulin.

Many diabetics, not all diabetics, but many diabetics

need to take insulin daily.

They need to inject it in order to maintain their blood sugar

level.

If they don't do it, bad things will happen to their body.

And they might even prematurely die

if they don't take their insulin on time.

So let's think about what the elasticity of demand

might look like for something like insulin.

So in one column, I'll put price.

And in the other column, I will put quantity.

So let's say that insulation right now

is going for $5 a vial.

And we have a group of diabetics who need insulin.

And they're all going to buy the insulin they need.

And let's say, in this group, that

turns out to be 100 vials per week.

So this is in vials per week.

Fair enough, that's exactly what they

need to do to maintain their insulin.

Now, what happens if the price changes?

What happens if the price were to go down?

Let's say the price were to go down to $1.

Well, what would the quantity be?

Well, they're not going to buy any more insulin.

They're going to buy just what they need in order

to maintain their diabetes.

And remember, we're holding all else equal.

We're not assuming any change in expectations of price.

They expect price go up or down or anything

like that So in this case, they'll

still just by 100 vials.

Now, what happens if the price went up a ton?

And what happens if the price went

to-- what happens if we went to $100 a vial.

Well, it would be hard for them.

But they need it to survive.

So it's going to squeeze out any other expenses

that they need to spend money on.

And so they still will buy 100 vials a week.

And so you could keep raising price, within reason.

And they would still buy the same quantity.

Obviously, if you raise it to $1 billion,

then they would just wouldn't be able to afford it.

But within reason, they're going to buy 100 vials per week,

no matter what the price is.

So this is an example of perfect inelasticity.

Another way, so if you think of the physical analogy

that we talked about with elasticity.

It's like a brick.

It doesn't matter how much, within reason once again,

any amount of force pulling or pushing

that a human could put on a brick,

it's not going to change.

It's not going to deform the brick in any way.

And likewise, any change in price within reason,

within reason here, isn't going to change

the demand in any way.

It's perfectly inelastic.

And if you want to do the computation,

you could look at inelas-- you could figure out the demand

elasticity for, let's say, when you're

going from a price of $5 to $1.

So the price went down by 4.

And the quantity changed by 0.

So your percent change in quantity,

so delta percent-- I'll write it-- percent change in quantity

is equal to 0.

And then, your percent is going to be over your percent

change in price if you use the averaging method.

It was-- it would be going down by 4 over an average of 250.

It'll be a fairly large number.

But at 0 over anything is still going to be 0.

So it doesn't matter what that thing is over here.

Your elasticity of demand in this situation is 0.

And if you wanted to see what this demand curve would

look like, let's plot it.

So this right over here is my price axis.

And that is my quantity axis.

And so no matter what, let's say this

is a quantity of 100 of vials per week.

That's true when the price is $5.

So that's true in the prices $5.

They're going to demand 100 vials a week.

That's true when the price is $1.

They're going to demand 100 vials a week.

And that's true, if the price is $20 or $100 or whatever.

They're going to demand 100 vials a week.

And so a perfectly inelastic demand curve

would look like this.

It is a vertical line.

It doesn't matter what price you pick.

The quantity demanded is always going

to be the exact same thing.

Now, let's go to another extreme.

So this is perfectly inelastic.

You can imagine.

Well, what is perfectly elastic.

Something that changes a lot if you have a small percentage

change in price.

And to think about that, let's look at these two vending

machines.

And you see that they both do sell cans of Coke.

That's a can of Coke there.

That is can of Coke there.

And let's say, starting off, the can of Coke,

let's say that they cost $1 in each vending machine.

And we're going to assume that this one, remember

all else equal.

So we're going to assume that this vending machine

right over here doesn't change.

Does not change.

So it's just going to be consistently charging

$1 for a can of Coke.

And they're sitting next to each other.

And it looks like they have a little coffee machine

in between right over here.

So let's think about the demand curve

for this, for Coca Cola in this vending machine

right over here.

So let's think about the price and the quantity.

So I'll do-- let me do price column and quantity demanded.

So let's say if the price is $1.

So if the price is $1, then just odds are,

it's going to get about half of the sales per week.

And let's say that ends up being, I don't know,

let's say that ends up being 100 cans.

This is in cans per week.

Now what happens?

And let me put some decimals here.

So this is $1.00.

The price is $1.00.

It sells 100 cans per week.

And probably this one also would also

sell about 100 cans per week.

Now, what happens if we have a very, very small change

in price.

So if we change, if we go from $1.00, instead of $1.00,

we are at $0.99.

What's going to happen?

So this, remember, this machine right over here

is not changing.

This is-- we're talking-- our demand curve is

for the quantity of Cokes sold from this machine.

And the price was for this machine.

So if this machine is even a penny cheaper.

And assuming that people, there aren't lines forming

and things like that, people are just

always going to go to this machine.

If it's easy enough, if there's no difference,

they're always going to go to this machine.

So this machine will be able to get, will sell all the Cokes.

So it's going to sell 200 Cokes.

Now, what happens if, instead of lowering the price by a penny,

you raise the price by a penny.

So instead of $1.00, your at $1.01.

Well, now everyone's going to go to the other vending machine.

They're going to say, oh, we don't-- even a penny,

might as well walk to this one.

Assuming everything else is equal.

So then, they're going to sell 0.

And so what would the demand curve look like here.

Let's plot it out.

So this is the price.

This right over, this axis right over here is quantity.

And this is in cans per week.

And so this is 0.

This is 100.

And then, this is 200.

And then this is a price of $1.

That's $1.

So at $1, the quantity demanded is 100 cans.

Fair enough.

Now, at $0.99, the quantity demanded is 200 cans.

So at $0.99, the quantity demanded is 200.

So $0.99 is right below that, it's 200.

So it's right over there.

It's like right, right, there's a little bit lower.

And $1.01 a little bit over here,

the quantity demanded is 0.

So the demand curve here is looks something like that.

So it's going to be almost horizontal.

So it's going to be approaching perfect elasticity, very

small changes in price end up with these huge changes,

huge changes in percent quantity demanded.

And I courage to work out the math to see here,

that you will get a very large number for elasticity.

And so something that is, this is

approaching perfect elasticity.

A truly perfect elasticity would be

something that is a horizontal line.

So in this case, so over here, our elasticity of demand--

and I'll talk about the absolute value of it, is 0.

And over here, the absolute value

of our elasticity of demand is infinity.

'50 Because, remember, it's percent change in quantity

over percent change in price.

When you go from either, from one scenario to another

over here, you're percent change in price is very small.

It's roughly about 1% in this scenario right over here.

Changing the price up or down about 1%.

But then, you see your quantity is changing, depending

on which one you're looking.

Your quantity is changing on the order of 50% to 100%,

from that 1% change in price.

So you have a huge elasticity of demand here.

It would be a real-- it would actually be a number.

But as you can imagine, as it becomes more and more

sensitive, as quantity demanded becomes

more and more sensitive to a percent change in price,

this curve is going to flatten out completely.

And you will have an infinite, absolute value

of your elasticity of demand.