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.