The 4 Types of Elasticity Explained | Economic Homework | Think Econ

Summary

This video introduces the concept of elasticity in economics, focusing on four types: own-price elasticity of demand, income elasticity of demand, cross-price elasticity of demand, and price elasticity of supply. It explains how these elasticities measure the responsiveness of quantity demanded or supplied to changes in price or income. The video also touches on the implications of positive or negative elasticities, such as identifying normal or inferior goods and substitutes or complements. Future videos will teach how to calculate these elasticities with real numbers.

Takeaways

• 📚 Elasticity is a fundamental concept in economics, particularly in macro and microeconomics.
• 🔢 There are four main types of elasticity: own-price elasticity of demand, income elasticity of demand, cross-price elasticity of demand, and price elasticity of supply.
• 📉 Own-price elasticity of demand (e_p) measures how quantity demanded changes with price changes and is always negative due to the law of demand.
• 💰 Income elasticity of demand (e_n) measures how quantity demanded changes with income changes, indicating whether a product is normal (positive) or inferior (negative).
• 🔄 Cross-price elasticity of demand (e_a,b) measures how quantity demanded of one good changes with the price of another related good, indicating if they are substitutes (positive) or complements (negative).
• 📈 Price elasticity of supply (e_s) measures how quantity supplied changes with price changes and is always positive according to the law of supply.
• 📋 The formula for elasticity is the percentage change in quantity divided by the percentage change in a determinant (price or income).
• 🎯 Elasticity coefficients help to understand the sensitivity of demand and supply to changes in their determinants.
• 👨‍🏫 Future videos will teach how to calculate these elasticities using real numbers, providing practical applications of the concept.
• 👍 The video encourages engagement by asking viewers to like, subscribe, and comment on the types of economic topics they'd like to see covered.

Q & A

What is elasticity in economics?

Elasticity is a measure of how quantity demanded and quantity supplied respond when one of their determinants, such as price or income, changes.

How many types of elasticity are there in economics?

There are four main types of elasticity: own-price elasticity of demand, income elasticity of demand, cross-price elasticity of demand, and price elasticity of supply.

What is own-price elasticity of demand and how is it denoted?

Own-price elasticity of demand measures how quantity demanded responds when the price of a good changes. It is typically denoted as e_p or e_sub_p.

Why is own-price elasticity of demand always negative?

It is always negative because the law of demand states that as price increases, quantity demanded decreases.

What is income elasticity of demand and how is it denoted?

Income elasticity of demand measures how quantity demanded responds when consumer income changes. It is denoted as e_n or e_sub_n.

How does a positive income elasticity of demand relate to a product?

A positive income elasticity indicates that the product is a normal good, meaning there is a positive correlation between income and quantity demanded.

What is cross-price elasticity of demand and how is it denoted?

Cross-price elasticity of demand measures how quantity demanded of one good responds to a price change of a related good. It is denoted as e_a,b or e_sub_a_comma_b.

What does the sign of cross-price elasticity of demand indicate about the relationship between two goods?

A positive sign indicates that the goods are substitutes, while a negative sign indicates that the goods are complements.

What is price elasticity of supply and how is it denoted?

Price elasticity of supply measures how much quantity supplied responds when the price of a good changes. It is denoted as e_s or e_sub_s.

Why is price elasticity of supply always positive?

It is always positive because the law of supply states that as price increases, quantity supplied increases, resulting in a positive coefficient for elasticity.

What is the general formula for calculating elasticity?

The general formula for elasticity is the percentage change in quantity, either demanded or supplied, divided by the percentage change in the determinant (price or income).

Will there be a future video on how to calculate elasticity?

Yes, the channel plans to make a video in the future that will show how to calculate elasticity with real numbers.

Outlines

00:00

📈 Introduction to Elasticity in Economics

The video introduces the concept of elasticity, a fundamental topic in both macro and microeconomics. The host explains that there are four types of elasticity: own-price elasticity of demand (denoted as e_p), income elasticity of demand (e_n), cross-price elasticity of demand (e_a,b), and price elasticity of supply (e_s). Elasticity measures how quantity demanded and supplied respond to changes in their determinants, which are primarily price and income. The video promises future content on calculating these elasticities.

Keywords

💡Elasticity

Elasticity in economics refers to the measure of how quantity demanded or supplied of a good responds to changes in one of its determinants, typically price or income. It is the central theme of the video, as it introduces the four types of elasticity that are fundamental to understanding consumer behavior and market dynamics. The video explains that elasticity can be positive or negative, indicating the direction of change in quantity relative to changes in price or income.

💡Price Elasticity of Demand

Price Elasticity of Demand (denoted as e_p or e_sub_p) is the percentage change in quantity demanded for a good or service divided by the percentage change in its price. It measures how sensitive the quantity demanded is to price changes. The video mentions that this elasticity is always negative due to the law of demand, which states that as price increases, quantity demanded decreases.

💡Income Elasticity of Demand

Income Elasticity of Demand (denoted as e_n or e_sub_n) is the percentage change in quantity demanded divided by the percentage change in income. It reflects how changes in consumer income affect the demand for a product. If this elasticity is positive, the product is considered a normal good, meaning demand increases as income rises. If it's negative, the product is an inferior good, and demand decreases as income increases.

💡Cross-Price Elasticity of Demand

Cross-Price Elasticity of Demand (denoted as e_a,b or e_sub_a_comma_b) measures how the quantity demanded for one good responds to a price change of a related good. It is calculated as the percentage change in the quantity demanded of good A divided by the percentage change in the price of good B. If this elasticity is positive, goods A and B are substitutes; if negative, they are complements. This concept helps understand how goods are related in the market.

💡Price Elasticity of Supply

Price Elasticity of Supply (denoted as e_s or e_sub_s) is the percentage change in quantity supplied divided by the percentage change in price. Unlike price elasticity of demand, this elasticity is always positive because the law of supply indicates that as price increases, the quantity supplied also increases. This measures the responsiveness of suppliers to price changes.

💡Law of Demand

The Law of Demand is a fundamental economic principle stating that there is an inverse relationship between price and quantity demanded, all else being equal. As prices fall, quantity demanded increases, and vice versa. The video uses this law to explain why own-price elasticity of demand is always negative.

💡Law of Supply

The Law of Supply is another core economic principle that asserts a direct relationship between price and quantity supplied, all else being equal. As prices rise, suppliers are willing to produce and sell more, and as prices fall, they supply less. The video explains that this is why price elasticity of supply is always positive.

💡Normal Good

A normal good is a product for which the demand increases as consumers' income increases. In the context of the video, a positive income elasticity of demand indicates that a product is a normal good. This is important for understanding consumer behavior and how market demand can change with economic conditions.

💡Inferior Good

An inferior good is a product that is consumed less as income increases. The video explains that if the income elasticity of demand is negative, the product is considered inferior. This concept is crucial for understanding consumer preferences and how they can shift with changes in income.

💡Substitutes

Substitutes are products that can be used in place of one another. If the cross-price elasticity of demand is positive, it indicates that the two goods are substitutes. This is significant because it shows how changes in the price of one good can affect the demand for another, related good.

💡Complements

Complements are products that are used together. If the cross-price elasticity of demand is negative, it means the goods are complements. The video uses this concept to explain how a price change in one good can decrease the demand for another, related good, which is an important aspect of market analysis.

Highlights

Introduction to the concept of elasticity in economics.

Elasticity measures how quantity demanded and supplied respond to changes in determinants like price and income.

There are four main types of elasticity: own-price elasticity of demand, income elasticity of demand, cross price elasticity of demand, and price elasticity of supply.

Own-price elasticity of demand (e_p) measures the response of quantity demanded to changes in the price of a good.

Income elasticity of demand (e_n) measures how quantity demanded responds to changes in consumer income.

Cross price elasticity of demand (e_a,b) measures the response of quantity demanded of one good to price changes of a related good.

Price elasticity of supply (e_s) measures how quantity supplied responds to changes in the price of a good.

The law of demand states that as price increases, quantity demanded decreases, making own-price elasticity of demand always negative.

If income elasticity of demand is positive, the product is a normal good; if negative, it's an inferior good.

Cross price elasticity of demand indicates whether goods are substitutes (positive) or complements (negative).

The law of supply states that as price increases, quantity supplied increases, making price elasticity of supply always positive.

A general formula for elasticity is the percentage change in quantity divided by the percentage change in a determinant.

Future videos will teach how to calculate these elasticities with real numbers.

Engagement invitation: viewers are encouraged to like, subscribe, and comment on the video for more economic topics.

The video concludes with a summary of the four types of elasticity introduced.

Transcripts

Hey everyone and welcome back to the channel.  So today we're going to be talking about  

a concept that you'll learn in introductory  macro and microeconomics and that is elasticity.  

There's four types of elasticity and we're  going to briefly introduce all of them today,  

and in the future we're going to make  a video on how you can calculate these  

four types of elasticity. With  that said let's get into it.

So as i mentioned before there's four main types  of elasticity that you're going to learn about in  

introductory macro and microeconomics. Basically,  elasticity is a measure of how quantity demanded  

and quantity supplied respond when one of their  determinants change. Now there's two determinants:  

price and income and that's we're going to be  focusing on for these four types of elasticity.  

The four types are as follows: own-price  elasticity of demand, which is typically denoted  

e subscript p or e sub p. Income elasticity of  demand e subscript n or e sub n. Cross price  

elasticity of demand which is e sub a comma b, and  price elasticity of supply which is e sub s. Now  

let's get into what each of these mean. So let's  start with own-price elasticity of demand or e sub  

p. The formula is percentage change in quantity  demanded divided by percentage change in price.  

Now what this does is it measures how quantity  demanded responds when the price of a good  

changes, however it's worth noting that this will  always be negative. Why is that? Well it'll always  

be negative because the law of demand says that as  price increases quantity demanded will decrease.  

Next we've got the income elasticity of demand or  e sub n. The formula for this one is simply the  

percentage change in quantity demanded divided  by the percentage change in income and this  

simply measures how quantity demanded responds  when consumer income changes. If elasticity  

is positive then the product is a normal good,  that is there is a positive correlation between  

n and quantity demanded. If elasticity is  negative, the product is an inferior good  

and that would imply that as income goes up  your quantity demanded will actually go down  

so n and Qd are negatively related to one another.  Next we have cross price elasticity of demand or  

e sub a comma b. And the formula for this is  the percentage change in quantity demanded of  

the first good good A divided by the percentage  change in the price of a related product good B  

or the second good. Now this measures how quantity  demanded of one good responds to a price change  

of the related good and the sign whether it  be positive or negative of this coefficient  

for elasticity will actually tell you how the two  goods are related. If elasticity is positive then  

the goods are substitutes. If the elasticity is  negative the goods are complements. If you need a  

reminder on what substitutes or complements are  there's another video that we can link on our  

channel. I advise that you check it out. Lastly we  got the price elasticity of supply or e sub s and  

the formula for this one is the percentage change  in quantity supplied divided by the percentage  

change in price. This measures how much quantity  supplied responds when the price of a good changes  

and contrary to price elasticity of demand this  coefficient will always be positive. Why is that?  

Well the law of supply states as price  increases quantity supplied will increase  

therefore the two parts of the ratio, the  numerator and the denominator will both go up  

simultaneously resulting in a coefficient for  elasticity which is always positive. Now if you  

were to take all four of these elasticities and  try to make an equation that suits all of them  

it would look something like this. Elasticity  is equal to the percentage change in quantity,  

either demanded or supplied, divided by  the percentage change in determinant,  

and the determinant could be price or it could  be income. And you simply take the percentage  

change in both of them. Now we can teach how  to actually calculate this with real numbers,  

in fact we plan to do that in the future so  definitely stay tuned for that where we'll  

show you how to calculate percentage change in Q  as well as percentage change in any determinants.  

Well there you have it. Now we've introduced you  to all four types of elasticity. As mentioned  

before we will be making videos on how to  calculate elasticity with real numbers in  

the future. If you enjoyed the video let us know  by liking the video, subscribing to the channel,  

and comment what sort of economic topics  or homework questions you'd like to see  

us cover in the future. Thanks for watching  this video and we'll catch you in the next.