Introduction to price elasticity of demand | APⓇ Microeconomics | Khan Academy

Summary

This video explains price elasticity of demand, a key economic concept that measures how sensitive the quantity demanded is to changes in price. The instructor compares it to stretching rubber bands, where elastic demand shows a large quantity change for a small price change, and inelastic demand shows the opposite. Using examples of burgers, the instructor calculates elasticity at different points on a demand curve and highlights how elasticity varies depending on price and quantity changes. The video also touches on different methods for calculating elasticity, such as the midpoint method.

Takeaways

• 📊 Price elasticity of demand measures how sensitive quantity is to changes in price.
• 🔢 It is represented as E and calculated by dividing the percent change in quantity by the percent change in price.
• 📉 An elastic demand means quantity changes significantly for a given price change, while inelastic demand means quantity changes little.
• 📈 The demand curve helps visualize price changes (vertical axis) and quantity changes (horizontal axis).
• 📝 Calculating price elasticity between two points on the demand curve involves tracking changes in both quantity and price.
• 🔄 In the example, a 100% change in quantity and an 11% change in price led to a price elasticity of demand of -9.
• 🔍 Price elasticity varies along the curve, even though the slope of the demand curve remains constant.
• 📉 Larger percentage changes in price at lower quantities make demand more elastic, while smaller changes at higher quantities make it inelastic.
• 📐 Different techniques (like the midpoint method) can be used to avoid discrepancies in price elasticity results depending on the direction of movement.
• 📏 A general rule is: if the absolute value of price elasticity is greater than 1, demand is elastic; if less than 1, demand is inelastic.

Q & A

What is price elasticity of demand?

Price elasticity of demand measures how sensitive the quantity demanded is to changes in price. It is represented as the percentage change in quantity divided by the percentage change in price.

How can price elasticity of demand be interpreted in relation to elasticity in general?

Price elasticity of demand can be compared to elasticity in general by considering how much quantity changes (stretches) in response to a change in price, similar to how much a rubber band stretches when force is applied.

What does a high price elasticity of demand indicate?

A high price elasticity of demand indicates that quantity demanded is very responsive to changes in price, meaning that a small change in price leads to a large change in quantity demanded.

What does an inelastic price elasticity of demand mean?

An inelastic price elasticity of demand means that quantity demanded is not very responsive to price changes, meaning a large change in price results in only a small change in quantity demanded.

How is price elasticity of demand calculated?

Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price.

Why does the price elasticity of demand vary across different points on the demand curve?

The price elasticity of demand varies across different points on the demand curve because the percentage changes in price and quantity depend on the initial values. The same absolute change in price or quantity will result in different percentage changes depending on the starting values.

What is the difference between the calculation method used in the video and the midpoint method?

The calculation method used in the video finds the price elasticity of demand based on initial values, which can yield different results when moving from point A to B versus B to A. The midpoint method uses the average values, providing a consistent result regardless of direction.

How can we interpret the sign of the price elasticity of demand?

The price elasticity of demand is generally negative, indicating that an increase in price leads to a decrease in quantity demanded (and vice versa). Economists often focus on the absolute value to describe whether demand is elastic or inelastic.

What does it mean if the absolute value of price elasticity of demand is less than 1?

If the absolute value of price elasticity of demand is less than 1, demand is considered inelastic, meaning that quantity demanded is relatively unresponsive to changes in price.

What does it mean if the absolute value of price elasticity of demand is greater than 1?

If the absolute value of price elasticity of demand is greater than 1, demand is considered elastic, meaning that quantity demanded is highly responsive to changes in price.