WEBVTT

00:00.640 --> 00:03.780
To get a better intuition for
the price elasticity of demand,

00:03.780 --> 00:07.180
I thought I would take a look at
some of the more extreme cases

00:07.180 --> 00:10.800
and think about what types
of elasticities of demand

00:10.800 --> 00:11.920
we would see.

00:11.920 --> 00:15.820
So this right over here
is a vial of insulin.

00:15.820 --> 00:18.390
Many diabetics, not all
diabetics, but many diabetics

00:18.390 --> 00:19.750
need to take insulin daily.

00:19.750 --> 00:22.331
They need to inject it in order
to maintain their blood sugar

00:22.331 --> 00:22.830
level.

00:22.830 --> 00:25.650
If they don't do it, bad things
will happen to their body.

00:25.650 --> 00:27.630
And they might even
prematurely die

00:27.630 --> 00:30.330
if they don't take
their insulin on time.

00:30.330 --> 00:33.170
So let's think about what
the elasticity of demand

00:33.170 --> 00:35.430
might look like for
something like insulin.

00:35.430 --> 00:37.540
So in one column,
I'll put price.

00:37.540 --> 00:40.610
And in the other column,
I will put quantity.

00:40.610 --> 00:42.520
So let's say that
insulation right now

00:42.520 --> 00:46.100
is going for $5 a vial.

00:46.100 --> 00:49.320
And we have a group of
diabetics who need insulin.

00:49.320 --> 00:51.670
And they're all going to
buy the insulin they need.

00:51.670 --> 00:53.200
And let's say, in
this group, that

00:53.200 --> 00:57.870
turns out to be
100 vials per week.

00:57.870 --> 00:59.370
So this is in vials per week.

01:02.299 --> 01:03.840
Fair enough, that's
exactly what they

01:03.840 --> 01:06.236
need to do to maintain
their insulin.

01:06.236 --> 01:07.860
Now, what happens if
the price changes?

01:07.860 --> 01:10.010
What happens if the
price were to go down?

01:10.010 --> 01:13.160
Let's say the price
were to go down to $1.

01:13.160 --> 01:15.070
Well, what would
the quantity be?

01:15.070 --> 01:17.779
Well, they're not going
to buy any more insulin.

01:17.779 --> 01:19.820
They're going to buy just
what they need in order

01:19.820 --> 01:21.379
to maintain their diabetes.

01:21.379 --> 01:23.170
And remember, we're
holding all else equal.

01:23.170 --> 01:26.020
We're not assuming any change
in expectations of price.

01:26.020 --> 01:27.960
They expect price go
up or down or anything

01:27.960 --> 01:29.620
like that So in
this case, they'll

01:29.620 --> 01:32.580
still just by 100 vials.

01:32.580 --> 01:34.514
Now, what happens if
the price went up a ton?

01:34.514 --> 01:35.930
And what happens
if the price went

01:35.930 --> 01:39.580
to-- what happens if
we went to $100 a vial.

01:39.580 --> 01:41.460
Well, it would be hard for them.

01:41.460 --> 01:42.802
But they need it to survive.

01:42.802 --> 01:44.760
So it's going to squeeze
out any other expenses

01:44.760 --> 01:46.320
that they need to
spend money on.

01:46.320 --> 01:50.390
And so they still will
buy 100 vials a week.

01:50.390 --> 01:52.920
And so you could keep
raising price, within reason.

01:52.920 --> 01:54.720
And they would still
buy the same quantity.

01:54.720 --> 01:56.770
Obviously, if you
raise it to $1 billion,

01:56.770 --> 01:58.895
then they would just wouldn't
be able to afford it.

01:58.895 --> 02:02.210
But within reason, they're
going to buy 100 vials per week,

02:02.210 --> 02:04.340
no matter what the price is.

02:04.340 --> 02:07.630
So this is an example
of perfect inelasticity.

02:16.200 --> 02:18.550
Another way, so if you think
of the physical analogy

02:18.550 --> 02:20.430
that we talked about
with elasticity.

02:20.430 --> 02:21.360
It's like a brick.

02:21.360 --> 02:24.430
It doesn't matter how much,
within reason once again,

02:24.430 --> 02:26.240
any amount of force
pulling or pushing

02:26.240 --> 02:27.730
that a human could
put on a brick,

02:27.730 --> 02:28.771
it's not going to change.

02:28.771 --> 02:30.870
It's not going to deform
the brick in any way.

02:30.870 --> 02:34.070
And likewise, any change
in price within reason,

02:34.070 --> 02:36.570
within reason here,
isn't going to change

02:36.570 --> 02:37.700
the demand in any way.

02:37.700 --> 02:39.740
It's perfectly inelastic.

02:39.740 --> 02:41.690
And if you want to
do the computation,

02:41.690 --> 02:44.960
you could look at inelas-- you
could figure out the demand

02:44.960 --> 02:46.670
elasticity for, let's
say, when you're

02:46.670 --> 02:50.260
going from a price of $5 to $1.

02:50.260 --> 02:53.550
So the price went down by 4.

02:53.550 --> 02:58.070
And the quantity changed by 0.

02:58.070 --> 03:01.380
So your percent
change in quantity,

03:01.380 --> 03:09.230
so delta percent-- I'll write
it-- percent change in quantity

03:09.230 --> 03:10.710
is equal to 0.

03:10.710 --> 03:13.120
And then, your percent is
going to be over your percent

03:13.120 --> 03:18.880
change in price if you
use the averaging method.

03:18.880 --> 03:23.019
It was-- it would be going down
by 4 over an average of 250.

03:23.019 --> 03:24.310
It'll be a fairly large number.

03:24.310 --> 03:26.520
But at 0 over anything
is still going to be 0.

03:26.520 --> 03:28.850
So it doesn't matter what
that thing is over here.

03:28.850 --> 03:34.570
Your elasticity of demand
in this situation is 0.

03:34.570 --> 03:37.180
And if you wanted to see
what this demand curve would

03:37.180 --> 03:39.770
look like, let's plot it.

03:39.770 --> 03:42.850
So this right over
here is my price axis.

03:42.850 --> 03:46.560
And that is my quantity axis.

03:46.560 --> 03:48.480
And so no matter
what, let's say this

03:48.480 --> 03:52.130
is a quantity of 100
of vials per week.

03:52.130 --> 03:56.970
That's true when
the price is $5.

03:56.970 --> 03:59.680
So that's true in the prices $5.

03:59.680 --> 04:02.420
They're going to demand
100 vials a week.

04:02.420 --> 04:04.600
That's true when
the price is $1.

04:04.600 --> 04:06.990
They're going to demand
100 vials a week.

04:06.990 --> 04:10.300
And that's true, if the price
is $20 or $100 or whatever.

04:10.300 --> 04:13.590
They're going to demand
100 vials a week.

04:13.590 --> 04:17.750
And so a perfectly
inelastic demand curve

04:17.750 --> 04:19.230
would look like this.

04:19.230 --> 04:21.149
It is a vertical line.

04:21.149 --> 04:23.550
It doesn't matter
what price you pick.

04:23.550 --> 04:26.010
The quantity demanded
is always going

04:26.010 --> 04:28.640
to be the exact same thing.

04:28.640 --> 04:30.670
Now, let's go to
another extreme.

04:30.670 --> 04:32.670
So this is perfectly inelastic.

04:32.670 --> 04:33.430
You can imagine.

04:33.430 --> 04:35.200
Well, what is perfectly elastic.

04:35.200 --> 04:38.670
Something that changes a lot
if you have a small percentage

04:38.670 --> 04:39.707
change in price.

04:39.707 --> 04:42.040
And to think about that, let's
look at these two vending

04:42.040 --> 04:42.550
machines.

04:42.550 --> 04:45.410
And you see that they
both do sell cans of Coke.

04:45.410 --> 04:46.900
That's a can of Coke there.

04:46.900 --> 04:49.350
That is can of Coke there.

04:49.350 --> 04:51.800
And let's say, starting
off, the can of Coke,

04:51.800 --> 04:54.120
let's say that they cost
$1 in each vending machine.

04:58.349 --> 05:00.390
And we're going to assume
that this one, remember

05:00.390 --> 05:01.350
all else equal.

05:01.350 --> 05:04.630
So we're going to assume
that this vending machine

05:04.630 --> 05:06.140
right over here doesn't change.

05:06.140 --> 05:09.840
Does not change.

05:09.840 --> 05:12.480
So it's just going to
be consistently charging

05:12.480 --> 05:14.475
$1 for a can of Coke.

05:14.475 --> 05:16.100
And they're sitting
next to each other.

05:16.100 --> 05:17.650
And it looks like they have
a little coffee machine

05:17.650 --> 05:19.270
in between right over here.

05:19.270 --> 05:21.250
So let's think about
the demand curve

05:21.250 --> 05:24.980
for this, for Coca Cola
in this vending machine

05:24.980 --> 05:26.090
right over here.

05:26.090 --> 05:28.090
So let's think about the
price and the quantity.

05:28.090 --> 05:33.620
So I'll do-- let me do price
column and quantity demanded.

05:33.620 --> 05:35.990
So let's say if the price is $1.

05:35.990 --> 05:42.860
So if the price is $1,
then just odds are,

05:42.860 --> 05:45.240
it's going to get about
half of the sales per week.

05:45.240 --> 05:49.050
And let's say that ends
up being, I don't know,

05:49.050 --> 05:52.100
let's say that ends
up being 100 cans.

05:52.100 --> 05:53.480
This is in cans per week.

05:57.570 --> 05:58.354
Now what happens?

05:58.354 --> 05:59.770
And let me put
some decimals here.

05:59.770 --> 06:01.289
So this is $1.00.

06:01.289 --> 06:02.080
The price is $1.00.

06:02.080 --> 06:03.420
It sells 100 cans per week.

06:03.420 --> 06:04.961
And probably this
one also would also

06:04.961 --> 06:06.520
sell about 100 cans per week.

06:06.520 --> 06:09.310
Now, what happens if we have
a very, very small change

06:09.310 --> 06:10.870
in price.

06:10.870 --> 06:15.770
So if we change, if we go
from $1.00, instead of $1.00,

06:15.770 --> 06:20.890
we are at $0.99.

06:20.890 --> 06:22.470
What's going to happen?

06:22.470 --> 06:24.810
So this, remember, this
machine right over here

06:24.810 --> 06:25.600
is not changing.

06:25.600 --> 06:27.970
This is-- we're talking--
our demand curve is

06:27.970 --> 06:30.420
for the quantity of Cokes
sold from this machine.

06:30.420 --> 06:32.750
And the price was
for this machine.

06:32.750 --> 06:35.340
So if this machine is
even a penny cheaper.

06:35.340 --> 06:37.780
And assuming that people,
there aren't lines forming

06:37.780 --> 06:39.630
and things like
that, people are just

06:39.630 --> 06:41.274
always going to go
to this machine.

06:41.274 --> 06:43.190
If it's easy enough, if
there's no difference,

06:43.190 --> 06:44.981
they're always going
to go to this machine.

06:44.981 --> 06:48.090
So this machine will be able to
get, will sell all the Cokes.

06:48.090 --> 06:51.956
So it's going to sell 200 Cokes.

06:51.956 --> 06:54.580
Now, what happens if, instead of
lowering the price by a penny,

06:54.580 --> 06:56.140
you raise the price by a penny.

06:56.140 --> 06:59.267
So instead of $1.00,
your at $1.01.

06:59.267 --> 07:01.850
Well, now everyone's going to
go to the other vending machine.

07:01.850 --> 07:03.933
They're going to say, oh,
we don't-- even a penny,

07:03.933 --> 07:05.610
might as well walk to this one.

07:05.610 --> 07:07.510
Assuming everything
else is equal.

07:07.510 --> 07:11.300
So then, they're
going to sell 0.

07:11.300 --> 07:14.540
And so what would the
demand curve look like here.

07:14.540 --> 07:15.555
Let's plot it out.

07:18.200 --> 07:20.440
So this is the price.

07:20.440 --> 07:24.200
This right over, this axis
right over here is quantity.

07:24.200 --> 07:26.180
And this is in cans per week.

07:26.180 --> 07:27.960
And so this is 0.

07:27.960 --> 07:30.690
This is 100.

07:30.690 --> 07:32.510
And then, this is 200.

07:32.510 --> 07:35.040
And then this is a price of $1.

07:35.040 --> 07:36.570
That's $1.

07:36.570 --> 07:41.290
So at $1, the quantity
demanded is 100 cans.

07:41.290 --> 07:42.380
Fair enough.

07:42.380 --> 07:46.650
Now, at $0.99, the quantity
demanded is 200 cans.

07:46.650 --> 07:50.090
So at $0.99, the
quantity demanded is 200.

07:50.090 --> 07:53.910
So $0.99 is right
below that, it's 200.

07:53.910 --> 07:55.670
So it's right over there.

07:55.670 --> 07:58.470
It's like right, right,
there's a little bit lower.

07:58.470 --> 08:00.180
And $1.01 a little
bit over here,

08:00.180 --> 08:03.710
the quantity demanded is 0.

08:03.710 --> 08:13.060
So the demand curve here is
looks something like that.

08:13.060 --> 08:15.740
So it's going to be
almost horizontal.

08:15.740 --> 08:18.950
So it's going to be approaching
perfect elasticity, very

08:18.950 --> 08:23.520
small changes in price end
up with these huge changes,

08:23.520 --> 08:27.110
huge changes in percent
quantity demanded.

08:27.110 --> 08:29.590
And I courage to work
out the math to see here,

08:29.590 --> 08:32.905
that you will get a very
large number for elasticity.

08:32.905 --> 08:34.280
And so something
that is, this is

08:34.280 --> 08:36.039
approaching perfect elasticity.

08:36.039 --> 08:39.058
A truly perfect
elasticity would be

08:39.058 --> 08:43.139
something that is
a horizontal line.

08:43.140 --> 08:47.280
So in this case, so over here,
our elasticity of demand--

08:47.280 --> 08:50.220
and I'll talk about the
absolute value of it, is 0.

08:50.220 --> 08:52.450
And over here,
the absolute value

08:52.450 --> 08:55.700
of our elasticity of
demand is infinity.

08:55.700 --> 08:58.450
'50 Because, remember, it's
percent change in quantity

08:58.450 --> 09:00.050
over percent change in price.

09:00.050 --> 09:03.070
When you go from either,
from one scenario to another

09:03.070 --> 09:06.030
over here, you're percent
change in price is very small.

09:06.030 --> 09:09.450
It's roughly about 1% in this
scenario right over here.

09:09.450 --> 09:12.260
Changing the price
up or down about 1%.

09:12.260 --> 09:14.710
But then, you see your
quantity is changing, depending

09:14.710 --> 09:15.876
on which one you're looking.

09:15.876 --> 09:19.380
Your quantity is changing
on the order of 50% to 100%,

09:19.380 --> 09:21.050
from that 1% change in price.

09:21.050 --> 09:22.976
So you have a huge
elasticity of demand here.

09:22.976 --> 09:25.100
It would be a real-- it
would actually be a number.

09:25.100 --> 09:27.640
But as you can imagine, as
it becomes more and more

09:27.640 --> 09:29.290
sensitive, as quantity
demanded becomes

09:29.290 --> 09:32.060
more and more sensitive to
a percent change in price,

09:32.060 --> 09:34.040
this curve is going to
flatten out completely.

09:34.040 --> 09:36.720
And you will have an
infinite, absolute value

09:36.720 --> 1193:02:47.296
of your elasticity of demand.