0: - [Instructor] We are now going to discuss price elasticity

3: of demand, which sounds like a very fancy concept,

7: but really, it's a way for economists to sense

10: how sensitive is quantity to change in prices.

14: And in this video, we're gonna denote it as a capital E,

18: so E, price elasticity of demand.

22: And the easy way to think about it is

24: it is your percent change in, I'll use the Greek letter

27: delta as shorthand for change in here,

29: percent change in quantity over

32: your percent change in price.

36: And so, you might say, wait, how does this relate

38: to the everyday idea of elasticity?

42: Well, imagine two bands.

44: So, let's imagine an inelastic band,

47: inelastic, right over here, and let's imagine

51: an elastic band right over here.

55: So, in an inelastic band, if we apply some amount of force,

58: you're not going to be able to stretch it much,

59: it might stretch a little bit, while an elastic band,

62: if you apply that same amount of force,

64: you might be able to stretch it a lot more.

67: And so, the analogy here is we're not using force,

70: but we're saying how much does quantity stretch

73: for a given amount of price change?

76: And so, something where the quantity changes a lot

79: for a given price change would be very elastic.

82: So, this, the magnitude of this will be larger.

85: And if the percent change in quantity doesn't change a lot

89: for a our given percent change in price,

91: well, then we're dealing with an inelastic

93: price elasticity of demand.

95: And we'll be able to internalize these more

97: as we work through the numbers.

99: And actually, let's do that for this

101: demand schedule that we have right over here,

103: and it's visualized as our demand curve.

106: In the vertical axis, we have price of burgers;

109: and then in our horizontal axis,

111: we have quantity, in terms of burgers per hour.

114: And so, let's just use this definition of price

117: elasticity of demand to calculate it

119: across different points on our demand curve.

123: So, I'm gonna make a new column here,

125: so price elasticity of demand.

129: And the way I'm gonna do it is really

131: the simplest method for calculating this.

134: In other videos, we can go into more

136: in-depth methods, like the midpoint method.

139: And I'll show you the weakness

140: in what we're doing right here.

142: But for the sake of, say, an AP economics,

144: microeconomics course, this would be sufficient.

147: So, let's think about our price elasticity of demand

151: as we go from point A to point B.

155: Well, remember, that's just going to be our percent change

158: in quantity over our percent change in price.

162: So, what is our percent change in quantity?

167: Well, we're starting at a quantity of two,

171: so I'll put that in our denominator.

172: And we're going from two to four, so we are adding two.

177: So, we have two over two, we could

180: multiply that times 100% if we like.

183: So, this would give us, we have 100% change in quantity

187: over, now what was the corresponding

189: change in price, percent change in price?

193: So, our corresponding percent change in price,

196: our initial price is nine, and we go from nine to eight,

201: so we're going down by one.

203: And then we multiply that times 100%.

207: So, this is going to be about a negative 11%

211: change in price.

213: And this math is reasonably straightforward

215: because the 100%s cancel out, this is just a one.

220: One over negative 1/9 is just going

223: to be equal to negative nine.

226: So, you have a negative nine price elasticity of demand.

232: So, before I interpret that more,

233: let's look at the price elasticity of demand

235: at other points, or starting from other points

238: to other points on this curve.

240: So, let's think about it going from,

242: actually let's think about it going from E to F.

245: So, as we go from E to F, we're going

247: to do the same exact exercise.

249: What is our percent change in quantity?

252: Well, our initial quantity is 16.

255: And we're going from 16 to 18, so we have a change of two.

259: So, two over 16 times 100%,

262: that is our percent change in quantity.

264: And what is our percent change in price?

268: Well, our initial price is two.

271: And we're going from two to one,

274: so we have a price change of negative one times 100%.

281: And so, what you see here is this is 1/8 times 100%,

284: this would be 12.5% up here.

287: So, this is 12.5% up there, and then this,

292: over here, is going to be negative 50%.

295: So, when price went down by 50%,

299: you had a 12.5% increase in quantity.

304: 12.5% is 1/4 of 50%, so this is going to give us

309: a price elasticity of demand of negative 0.25.

317: So, there's a couple of interesting things

319: that you might already be realizing.

321: One is even though our demand curve right over here

325: is a line, it actually has a constant slope,

328: you see that the price elasticity of demand changes,

331: depending on different parts of the curve.

334: Now, the reason why this is,

336: is really just boils down to math.

338: When we're going from A to B,

340: our initial prices were relatively high.

342: So, even though you had a price decrease of one,

346: it was from an initial price of nine.

348: So, your percentage change in price looked fairly low,

351: while your percentage change in quantity was high

353: 'cause you're going from a low quantity of two,

356: and you're adding two to it,

358: so you had 100% change in quantity.

360: When you go to the other end our curve,

363: and you go from E to F, it's the other way around.

365: Your price starting point is low,

368: so your percent change in price,

370: when you decrease price by one,

372: it looks like a fairly large magnitude;

375: while your percent change in quantity

376: when you go from E to F because you are already

379: at a quantity of 16, adding two to that

381: is not that large of a percentage.

383: Now, another thing you might be appreciating

385: is if we tried to calculate the price elasticity of demand

389: up here on the curve, and instead of going from A to B,

391: if we went from B to A, we would've gotten

394: a different value because our initial prices

397: and quantities would have been different.

399: Our initial price, we would've put an eight right over here,

402: and our initial quantity, we would've put a four over here,

404: and we would've gotten a different value.

406: And that's one of the negatives of the technique,

408: which is arguably the simplest technique, that I just used.

411: There's other techniques, like the midpoint technique,

413: that can give you a more consistent result,

415: whether you're going from A to B or B to A,

417: but I won't cover it just yet.

419: But let's think, now, about how to interpret this.

423: And the best way to interpret it is to think

424: about the absolute value of the price elasticity of demand.

429: So, over here, the absolute value of our

432: price elasticity of demand is equal to nine,

435: and then, over here, the absolute value

438: of our price elasticity of demand is equal to 0.25.

446: And a general rule of thumb is if your absolute value

450: of your price elasticity of demand is less than one,

454: you are dealing with an inelastic, inelastic,

460: elastic situation;

462: and if your price elasticity of demand,

465: the absolute value of it, is greater than one,

468: you're dealing with an elastic situation.

471: Why does that make sense?

472: Well, in this first scenario, it's saying

475: for a given percentage change in price,

478: you have a smaller percent change in quantity;

482: while here, for a given percent in price,

485: you're going to have a larger than that

487: percentage change in your quantity.

489: So, once again, it goes back to these rubber band analogies.

493: So, when we're going from A to B,

494: the absolute value of our price elasticity of demand

498: is definitely larger than one.

501: So, economists would consider this

502: to be an elastic situation;

506: while when we go from point E to point F,

508: our price elasticity of demand,

510: or the absolute value of it, is definitely less than one,

514: so this going to be an inelastic situation.