Paul Solman - elasticity pt1
Summary
TLDRThis script explores the concept of elasticity in economics, particularly price elasticity of demand and supply. It uses examples like ice cream cones and natural gas to illustrate how quantity demanded changes with price. The discussion also covers how elasticity varies with the scale and the real-world impact of severe weather on natural gas prices. The script explains elasticity coefficients, using Major League Baseball ticket sales as an example, and concludes with a quiz to test understanding of elasticity for various goods.
Takeaways
- đ Elasticity in economics refers to the responsiveness of quantity demanded or supplied to changes in price.
- đŠ Price elasticity of demand is demonstrated by the slope of the demand curve; as price increases, quantity demanded decreases.
- đ The angle of the demand curve's slope indicates the degree of elasticity, with steeper slopes showing less elasticity.
- đĄïž In 2000, natural gas prices spiked due to severe weather conditions that increased demand for gas.
- đ The demand for natural gas is price inelastic, meaning consumers are less responsive to price changes.
- đ An example of price elasticity is given by Major League Baseball ticket sales, where a 1% increase in price results in a less than 1% decrease in quantity demanded.
- đ„ Basic necessities like bread have low elasticity coefficients, indicating inelastic demand.
- đ Non-essential items like auto repairs and movie tickets have higher elasticity coefficients, showing more responsiveness to price changes.
- đœïž Expendable luxuries, such as restaurant meals, have high elasticity coefficients, indicating elastic demand.
- đ Elasticity coefficients are calculated at the current price, as elasticity can change along a linear demand curve.
- đĄïž Essential goods and services, like life-saving medical care, tend to have inelastic demand curves due to their necessity.
Q & A
What does the term 'elasticity' mean in economics?
-Elasticity in economics refers to the responsiveness or sensitivity of quantity demanded or supplied to changes in price.
Why are supply and demand schedules usually sloped?
-Supply and demand schedules are usually sloped because quantity demanded and supplied typically respond to changes in price.
How does the price of ice cream cones relate to the concept of price elasticity of demand?
-As the price of ice cream cones increases, the quantity demanded decreases, demonstrating that consumers exhibit price elasticity of demand.
What would a perfectly vertical supply schedule imply about price elasticity?
-A perfectly vertical supply schedule would imply that suppliers are not responsive to price changes, showing no price elasticity of supply.
Why did natural gas prices spike to historically high levels in the year 2000?
-Natural gas prices spiked in 2000 due to severe weather conditions that increased demand and reduced supply from substitute sources.
How does the elasticity of demand for natural gas differ from other goods?
-The demand for natural gas can be unusually inelastic, meaning consumers are less likely to reduce their consumption in response to price increases.
What is the elasticity coefficient and how is it calculated?
-The elasticity coefficient measures the responsiveness of quantity demanded or supplied to changes in price, calculated as the percentage change in quantity over the percentage change in price.
What does an elasticity coefficient of less than one indicate?
-An elasticity coefficient of less than one indicates that the demand or supply is inelastic, meaning quantity changes less than price.
How did Major League Baseball ticket sales respond to a 1% price increase?
-A 1% price increase in Major League Baseball tickets resulted in a decrease in sales by about 64 fans per game, indicating an inelastic demand.
Why does elasticity change along a straight-line demand curve?
-Elasticity changes along a straight-line demand curve because the percentage change in quantity demanded relative to price changes varies depending on the point on the curve.
What is the significance of a demand curve being price inelastic?
-A price inelastic demand curve signifies that consumers are highly dependent on the product and are less responsive to price changes, often due to a lack of suitable substitutes.
Outlines
đ Elasticity and Price Response in Economics
This paragraph introduces the concept of elasticity in economics, specifically price elasticity of demand and supply. It explains how the responsiveness of quantity demanded or supplied to changes in price is represented by the slope of the supply and demand curves. The example of ice cream cones is used to illustrate how an increase in price leads to a decrease in quantity demanded. The paragraph also discusses how elasticity is measured in terms of percentage changes in quantity over price changes and how it helps explain real-world economic phenomena. It sets the stage for a real-world example by discussing the spike in natural gas prices in the year 2000, attributing it to weather conditions and changes in demand and supply.
đ Understanding Elasticity Coefficients and Their Impact
This paragraph delves deeper into the concept of elasticity coefficients, explaining how they are used to quantify the responsiveness of demand or supply to price changes. It uses Major League Baseball ticket prices as an example to illustrate the calculation of elasticity coefficients and how they can be less than, equal to, or greater than one, indicating inelastic, unit elastic, and elastic demand, respectively. The paragraph also discusses how elasticity can vary along a linear demand curve, becoming more inelastic as the slope becomes more vertical. It concludes with a discussion on why certain goods, such as natural gas, life-saving medical care, and addictive substances, tend to have inelastic demand, meaning consumers are less responsive to price changes due to a lack of suitable substitutes or high dependency on the product.
Mindmap
Keywords
đĄElasticity
đĄPrice Elasticity of Demand
đĄSupply
đĄInelastic
đĄUnit Elastic
đĄEquilibrium Price
đĄPercentage Change
đĄMajor League Baseball
đĄNatural Gas
đĄSubstitutes
đĄAddictive Substances
Highlights
Elasticity in economics refers to responsiveness to price changes.
Supply and demand schedules are usually sloped due to price elasticity.
An increase in price typically leads to a decrease in quantity demanded.
The slope of the demand curve represents consumers' price elasticity of demand.
The supply curve also slopes in response to price changes, indicating suppliers' price elasticity.
Elasticity is measured by the percentage change in quantity over the percentage change in price.
In 2000, natural gas prices spiked due to severe weather and reduced energy from substitutes.
The demand for gas increased, shifting the demand curve to the right.
The price of natural gas spiked to over $8, contrary to the modest increase suggested by the graph.
The graph visually misrepresents the price elasticity of demand for natural gas.
Elasticity is measured using percentages to determine how responsive demand or supply is to price changes.
In 2003, a 1% increase in Major League Baseball ticket prices led to a 0.25% decrease in sales.
An elasticity coefficient of less than one indicates inelastic demand.
An elasticity coefficient of one indicates unit elastic demand.
An elasticity coefficient greater than one indicates price elastic demand.
Elasticity coefficients are given at the current price, at equilibrium.
Elasticity changes as you move up and down a straight-line demand schedule.
A linear demand schedule becomes more inelastic the more vertical its slope.
Consumers are unusually dependent on natural gas, leading to inelastic demand.
Demand for life-saving medical care or addictive substances is generally price inelastic.
The more you rely on something without substitutes, the more unresponsive you are to price changes.
Transcripts
elasticity is a favorite term in
economics meaning responsiveness to
price it's why supply and demand
schedules are usually sloped because
quantity usually responds to changes in
price take ice cream cones the more they
cost the fewer people buy that's what
the slope means as the price goes up
fewer and fewer ice cream cones are
demanded as it goes down the quantity
demanded increases so consumers respond
to price they Exhibit price elasticity
of
demand Supply also slopes in response to
price Rising as the price Rises so
suppliers too show some price elasticity
if they didn't the supply schedule would
be perfectly vertical the same quantity
of ice cream supplied no matter what the
price similarly if demand were
unresponsive to price or totally price
inelastic the demand schedule two would
be a vertical line the same quantity of
ice cream cones demanded no matter what
the
price notice though that when either
schedule slopes and indicates elasticity
the actual angle depends on the scale
the angle steeper if a $5 price is up
here but if we use a scale that puts $5
lower down the angle is more horizontal
that's why elasticity is always measured
in terms of percentages change in
quantity over change in price a
calculation the textbook explains and
that the Discover econ software allows
you to actually
practice for our purposes though the
importance of elasticity is how it helps
explain the real world so the rest of
this segment is devoted to solving a
real world economic puzzle why in the
year 2000 did natural gas prices Spike
to historically unheard of levels the
first reason was the weather it got so
cold in my native New England for
instance that even Frosty bundled up
meanwhile California was so hot that air
conditioners overloaded the power grid
and in the Northwest it was so dry that
Hydro power plants couldn't provide
extra
power okay so far so simple in the
winter of 2002 2001 severe weather and
less energy from substitute sources
increased the demand for gas more demand
the demand curve shifted to the right so
the quantity of gas purchased Rose
suddenly from its then current
level now the way we've drawn this graph
it suggests that at equilibrium price
should rise modestly for a modest
increase in demand but in fact the price
spiked to over
$8 so what's wrong with this picture
well for one thing it visually
misrepresents the price elastic it of
demand for natural gas so let's back up
a step the key question about elasticity
is how elastic that is how responsive is
demand or for that matter Supply to
changes in price but remember the answer
is measured in
percentages using percentages then let's
look at Major League Baseball in 2003
the average ticket price was about $20
average attendance about 28,000 people
per game
what do you guess would happen if the
league upped the price to
$20.20 a ticket a 1% price increase well
according to current data ticket sales
would drop by about 64 fans per game a
change of just under a quarter of a
percent so quantity changes less than
price in this case resulting in an
elasticity coefficient of
.23 now an elasticity coefficient of
less than one is is the same as saying
in elastic so at current prices the
demand for baseball tickets is price in
elastic if a 1% price rise were to cause
exactly a 1% decrease in ticket sales
we'd call the demand for tickets unit
elastic sometimes referred to as an
elasticity of
one and finally if a 1% price increase
were to cause more than a 1% % dip in
quantity demanded we'd have an
elasticity coefficient of more than one
and demand would be price
elastic so now that you know
this let's see how you do in our big
league elasticity
quiz take a guess at elasticity
coefficients for the following items at
current
prices bread elastic or inas
elastic actually .15 way less than one
and thus
inelastic the demand for bread is not
very responsive to
Price Auto Repair elastic or
inelastic point 4 still relatively
inelastic movie
tickets 87 oh almost unit elastic but
not
quite finally a restaurant meal
2.27 quite elastic lots of us would stop
eating out if current prices
[Music]
rise now elasticity coefficients are
given at the current price that is at
equilibrium the reason is because of a
frustrating fact about elasticity when
it's depicted simply L by a straight
line as here with the demand curve on a
straight line elasticity changes as you
move up and down this demand schedule
for instance is much more elastic at the
top than at the bottom take price it's
at the top of its range thus any move up
here from say $10 to $9 is a relatively
small change in percentage terms
10% however you can see that this this
causes a change in quantity demanded
from one movie ticket to two that's a
change of 100% when quantity demanded
changes more than price in percentage
terms demand is price
elastic meanwhile down here the opposite
occurs we're in the price range that
changes a lot in percentages it doubles
from $1 to
$2 yet the quantity demanded only drops
from 10 to 9 so he here in percentage
terms quantity demanded changes less
than price and is price inelastic just
because of where we are on the line but
all else equal a linear demand schedule
becomes more inelastic the more vertical
at slope quantity demanded is less
responsive here than it was here which
may begin to help illustrate our story
since the demand for natural gas could
be unusually in elastic which it would
be easy to depict as unusually vertical
in plain English consumers would be
unusually dependent on this product and
therefore they wouldn't cut back much on
their demand for natural gas if the
current price went up consumers would
demand this quantity when prices were
low and just a little less when prices
were higher in other words the quantity
demanded wouldn't respond much to price
or in personal terms I'm not about to
lower my gas consumption by turning down
my thermostat say to
55 natural gas isn't the only demand
curve that's generally price in elastic
people are also generally unresponsive
to price when it comes to life-saving
medical
care or addictive substances like
tobacco or alcohol which you don't tend
to buy much less of when the price goes
up that is the more you rely on
something for which there are no
suitable substitutes suits the more
unresponsive you are to changes in price
the more inelastic your demand almost
anywhere on the schedule
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