WEBVTT

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What I want to do in this video is

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focus a little bit more on the results of the last video.

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Make sure that they make intuitive and mathematical sense to us

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because something slightly strange happened.

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We had a linear demand curve right over here,

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which means for any given change in price right over here.

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So in all of the examples,

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whether we went from A to B or C to D or E to F,

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we had a $1 drop in price.

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we had a $1 drop in price.....a $1 drop in price.

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And every time we had a $1 drop in price

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we had a $2 increase, oh sorry,

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we had a 2 unit increase in quantity demanded.

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So we had a 2 unit increase in quantity demanded.

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This is a linear demand curve.

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But despite the fact that for each dollar drop in price,

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we had the same increase in quantity demanded.

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The slightly maybe un-intuitive thing that happened

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was that we had a slight, we had a different -

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actually very different elasticity of demand.

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And you might imagine that

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it probably had something to do with the fact that

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elasticity of demand is based on

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% change in quantity relative to % change in prices,

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instead of just change in quantity over change in price.

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If it was just change in quantity over change in price,

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we would get something...it would be constant.

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But we saw very very different results.

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When you look closely at these,

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so let's focus on this region between A and B right over here,

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we had a $1 change in price.

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Our $1 change in price was on a relatively large base,

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our price was already high.

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Remember we used to figure out the % change,

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we use a dollar over the average,

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the average of our 2 points.

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so we don't do $1 over 9

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because then we would have a different elasticity

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when we went from A to B

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then when we went from B to A.

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A dollar over 9 versus a dollar over 8

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would give you 2 different percentages.

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Instead we say a dollar over eight and a half.

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So this per price % change was in the teens

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while this quantity % change is going to be with 67%

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2 over an average quantity of 3

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in this region right over here.

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So you had a relatively large,

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actually quite large % change in quantity

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over relatively small % change in price.

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67% over something that's in,

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roughly in the mid-teens percentage.

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And so that's why the absolute value of our elasticity of demand

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was a relatively large number.

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If you don't think about the absolute value,

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you get a negative number

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because this is a downward sloping line.

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But if you focus on the absolute value,

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it's a - the magnitude of it- is a relatively large number,

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a relatively large % change in quantity

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relative to your % change in price.

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And it all comes out of, your quantities are low here.

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So if you move 2 on a low base,

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you are going to have a large % change in quantity

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and your prices are relatively high here.

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So a change in 1 isn't going to be that large of a percentage.

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But what you have,

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when your absolute value of your elasticity of demand

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is greater than 1, like it is right over here,

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so when your absolute value of your elasticity of demand

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is greater than 1,

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it's usually called, at this point in the curve,

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is ELASTIC or generally elastic. So this is elastic.

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You get some nice % movements in quantity

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for given % change in price.

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Then when you go over here, our prices have gone -

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our prices are lower

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when we are in this region between C and D.

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So that dollar difference is going to be

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a larger % change in price

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and our quantities are higher,

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so that $2 change is going to be a lower change in quantity,

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and actually end up being the same thing,

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because you have a dollar change in price

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over an average base of 5, right?

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The average between 5.50 and 4.50 is 5.

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So if you have a 20% change in price, a 20% drop in price,

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and you have a 20% increase in quantity -

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a 20% increase in quantity.

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So let me write, this isn't the teens over here,

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my writing fitting is too small so I won't do that.

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So you have a 20% change in price

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and a 20% increase in quantity.

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That's 20% because you have 2 over the average here.

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2 over 10, so 20% increase.

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So that's why your elasticity of demand or

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the magnitude of your elasticity of demand is exactly 1.

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And if your magnitude of your elasticity of demand is exactly 1,

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we say that you have UNIT ELASTICITY at that point,

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elasticity.

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And then finally if you go all the way down here,

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our prices end up being quite low -

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our prices are quite low

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so a dollar change is actually a huge % price change, right?

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Our average base here is $1.50 in this region right over here.

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And so a dollar over a $1.50.

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It's a huge, it's actually a 67% change in price.

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67, yep that's right. yeah $1 is a 2/3 change in price.

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it's a huge % change in price.

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But once again now our quantity is much larger

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so $2 increase isn't that large of a change in quantity.

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So you have a smaller % change in quantity

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over a large % change in price.

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So that just means you're relatively inelastic.

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You are not getting a lot of change in quantity

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for the magnitude of your change in price.

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So if your -

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If the magnitude of the elasticity of demand

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is less than 1 over here,

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we call that either relatively inelastic or just inelastic.

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In...elas...tic.

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So I'll leave you there in this video,

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and just I want you to really kind of internalize

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what we're doing here, especially with the maths.

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And especially understanding why the elasticity is changed here.

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Get you thinking in terms of percentages.

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And also make you, hopefully you'll appreciate

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why we're taking the average of these 2 points.

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When we find the denominator for the percentages

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instead of just taking 1 of the 2 points,

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we get the same elasticity of demand

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either direction we go in.