WEBVTT

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What we're going to
think about in this video

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is elasticity of
demand-- tis-sit-tity,

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elasticity of demand.

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And what this is,
is a measure of how

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does the quantity demanded
change given a change in price?

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Or how does a change in price
impact the quantity demanded?

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So change in price--
impact quantity--

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want to be careful
here-- quantity demanded.

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When you talk about
demand, you're

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talking about the whole curve.

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Quantity demanded is a specific
quantity-- quantity demanded.

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And the way that we, as
economist-- I'm not really

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an economist, but since
we're doing economics,

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we could pretend
to be economists.

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The way that
economists measure this

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is they measure it as a
percent change in quantity

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over a percent-- over the
percent change in price.

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And the reason why they do
this, as opposed to just,

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say, change in quantity
over change in price,

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is because if you did change in
quantity over change in price

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you would have a number that's
specific to the units you're

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using.

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So it would depend on
whether you're doing quantity

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in terms of per hour, or
per week, or per year.

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And so you would have different
numbers based on the time

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frame, or the units,
that you might use.

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But when you use a percentage
it is a unitless number.

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Because the percentage--
you're taking a change

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in some quantity,
divided by that quantity.

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So the units themselves
actually cancel out.

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And the reason why it's
called elasticity--

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this might make some sense
to you-- or the reason

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why I like to think
it's called elasticity,

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is I imagine something
that's the elastic.

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Like a elastic band
or a rubber band.

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And in the rubber
band, if you pull it,

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depending if something--
so let's say this one

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is inelastic.

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So if you pull, you're not
going to able to pull it much.

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It's going to be fairly stiff.

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It's not going to stretch a lot.

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While something is
elastic-- if something

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is elastic for a given
amount of force--

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so this is for a given
amount of force--

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you're not able to pull it much.

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And if something
is elastic, maybe

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for the same amount
of force, you're

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going to be able
to pull it a lot.

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So this right over
here is elastic.

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And so the analogy, maybe,
might make a little bit sense--

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relative to applied
price and demand.

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Something is elastic-- so
let me write this down.

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So let me write, very elastic.

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If a given change in
price-- given price change

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you have-- and we'll talk about
percentages in a little bit.

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But a given change in price,
you have a large change

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in demand-- so large
percentage change.

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And let me just speak
in terms of percentage.

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Given a percentage
change in P, you

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end up having a large
percentage change in Q.

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That would be very elastic.

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So you could imagine
the P is like the force,

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and the Q, the
quantity demanded,

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is how far the thing
can get stretched apart.

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And that's why we would
call this very elastic.

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Just like a very
elastic rubber band.

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And if something is very
inelastic, if given a percent

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change in P, you have a
small percent change in Q.

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So just like a rubber band--
for a given amount of force,

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if you're not able to
pull it much at all,

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then it's inelastic.

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If you're able to pull
a lot, it's elastic.

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Same thing with
price and quantity.

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For a given change in price, if
the percent quantity demanded

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changes a lot-- very elastic.

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If it doesn't change a
lot-- very inelastic.

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Now, with that out
of the way, let's

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actually calculate
the elasticity

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for multiple points along this
demand curve right over here.

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And I think that will give
us a bit better grounding.

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Especially because there are a
little slightly-- I would call

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them unusual ways of calculating
the percent change in quantity

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and the percent
change of price--

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just so that we get
the same number when

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we have a positive
change in price.

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And the same as we get
the negative change

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in price-- or a negative and a
positive-- or a drop in price

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and an increase in price.

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So let me give myself
some real estate over here

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because I want to do
some actual mathematics.

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And actually all of this we will
be reviewing in what I'm about

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do, and it will give me some
real estate to work with.

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So let me clear all of that.

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And let me clear is
that right over here.

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And what I'm going
to do is I'm going

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to calculate the
elasticity of demand

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at several points along this
demand curve right over here.

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And so the first one,
I will do it at point A

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to point B. So let me
make another column

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right over here--
elasticity of demand.

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And actually,
we're going to have

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one column that's
elasticity of demand.

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So it's a big E with a little
subscript D. And the other one,

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I'll just take its
absolute value.

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Because, depending
on-- sometimes

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people like to just
think of the number,

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which will tend to
be a negative number.

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And sometimes,
people like to look

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at the absolute value of it.

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So we'll look at both and
see what it actually means.

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So let's say our price
drops from point A

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to point B. So from
point A to point

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B we have a $1-- a negative
$1 change in price.

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And we have a positive--
so this is a negative $1

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change in price.

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And we have a
positive $2-- sorry--

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a positive two burger per hour
change in quantity demanded.

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So what is the elasticity
of demand there?

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So let's write it over here.

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I'll do it in A's color.

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So the elasticity
of demand, remember,

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it's the percent
change in quantity.

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So percent change in
quantity-- I'll rewrite it.

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It's the percent
change in quantity

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over percent change in price.

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And so we have-- what's our
percent change in quantity?

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So it's going to be the change
in quantity over some base

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quantity.

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So our change in
quantity is two.

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So it's going to be
equal to 2 over-- now

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in traditional terms-- and this
is what I want to, kind of,

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clarify-- is a little bit
unusual in how we do it.

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But we do it, so that we get
the same elasticity of demand

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whether we go from
A to B or B to A.

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Or essentially, we get
the same elasticity

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of demand along this
whole part of the curve.

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Instead of just
dividing the change

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in quantity divided by
our starting point, what

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I want to do is
I'm going to divide

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the change in quantity divided
by the average of our starting

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and our ending, points.

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So that's going to be 2
over-- and I'll actually

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do the math explicitly.

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Actually, no, let's
just think about it.

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What's the average
between 2 and 4.

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Well, the average is
just going to be 3.

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That's the average of 2 and 4.

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Let me write it down
to, just so it's clear.

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That right over here
is 2 plus 4 over 2.

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That's how you get 3.

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That's how you would
calculate the average.

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So that is our
proportionate change.

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And then you want to
multiply by 100-- times 100--

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to actually get a percentage.

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And then, what is
our change in price?

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Well we're going to do the
same thing, or the percent

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change in price.

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Our change in price
is negative 1.

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It is negative 1 over-- and
once again, we don't just

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do negative 1 divided
by 9, we do it

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over the average of 8 and 9.

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And the average
of 8 and 9 is 8.5.

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And then multiply by 100
to get your percentage.

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Now, these 100s,
obviously, cancel out.

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These 100s cancel out.

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And so we are going to be
left with-- when you divide

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by a fraction,
it's the same thing

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as multiplying by its inverse.

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So we're going to get 2/3
times negative 8.5 over 1--

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or times negative 8.5.

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I'll get out our
calculator and it

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is-- well, multiply
2 times negative 8.5,

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and then divided by 3, which
gives us negative 5.6667.

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It's really negative 5 2/3.

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So I'll just write
it negative-- I'll

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round it-- it's negative 5.67.

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So this is approximately
equal to negative 5.67.

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So right over here
it's negative 5.67.

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And this absolute value
is, obviously, just 5.67.

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And I'll leave it to you
to verify, for yourself,

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that you'll get the same
elasticity of demand

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using this technique--
where you use

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the average as your
base in the percentage.

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Going from 9 to 8 as
going-- going from 9 to 8

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in price as going
from 8 to 9 in price.

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Which is different than if you
used the 9 as the base or the 8

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as the base.

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So this right here
is the elasticity

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of demand-- not just at point
A. You can, kind of, view

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it is the average
elasticity of demand

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over this little part of
the curve, which is really

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a line in this example--
over this part of the arc.

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So we'll write that
part right over here.

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I'll write the absolute value.

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The absolute value of our
elasticity of demand is 5.67.

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Now let's do the other two
sections right over here.

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So let's think
about what happens

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when we go from C to D. So our
elasticity of demand there.

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So from C to D we have a
change in quantity, once again,

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of plus 2.

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And our change in price,
once again, is negative 1.

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But we'll see, even though
that the change in the quantity

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over-- the change of
quantity is the same,

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and the change in
price is the same,

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we're going to have a
different elasticity of demand,

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because we have different
starting points.

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Our starting points and
our ending points for price

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are lower and our starting
and ending points for quantity

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are higher.

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So it will actually
change the percentage.

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So let's see what we get.

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So our percent change
in quantity-- we

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have a change in quantity of 2.

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And then our average
quantity is 9

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plus 11, which is 20,
divided by 2 is 10.

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All of that over
percent change in price.

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So we have-- let me scroll down
a little bit-- negative one

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divided by the average price.

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So negative 1 is
the change in price.

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And we want to divide
that by the average price.

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Well, $5.50 plus $4.50 is
$10-- divided by 2 is $5.00.

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So the average is $5.00.

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And we can multiply
the numerator

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by 100 and the
denominator by 100,

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but that won't change
anything, because we could just

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divide both by 100.

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And so this is
equal to 2 over 10,

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times-- dividing by a
fraction is the same thing

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as multiplying by its inverse--
times negative 5 over 1.

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And this is just because 2 over
10 is the same thing as 1/5.

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1/5 times negative 5 over
1-- it is negative 1.

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So this right over here.

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So our elasticity of demand
right over here is negative 1.

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Or it's absolute value is 1.

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So the absolute value of
the elasticity of demand,

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right over here, is equal to 1.

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Now let's just do
one more section,

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and maybe, the next video
we can think a little bit

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about what it's telling us.

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So let's do this last
section over here,

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just for some practice.

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I encourage you to pause
it and try it yourself.

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And so we're going to
think about this section

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right over here.

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So once again, our change
in quantity is plus 2,

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and our change in
price is negative 1.

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And our elasticity
of demand-- change

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in quantity-- 2 over average
quantity, which is 17.

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Change in price is negative
1 over average price--

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1 plus 2 divided by 2 is $1.50.

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Or $1.50 is right in between
these two-- divided by $1.50.

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We don't have to multiply the
numerator and the denominator

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by 100 because those
just cancel out.

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So we get 2 over 17,
times negative-- well,

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we could just write this
as negative $1.50 over 1.

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And this is equal
to-- getting our--

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getting our calculator back out.

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So this is equal to--
I'll just write-- well,

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it's really just going to be
negative 3 over 17, right?

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2 times negative $1.50
is negative 3 over 17.

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So negative 3 divided by 17
is equal to, I'll just say,

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negative 0.18.

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So here it is, negative 0.18,
and its absolute value is 0.18.

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So the elasticity of
demand over here is 0.18.

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And I'll leave you there,
and in the next video

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we'll think about these
results a little bit.