WEBVTT

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We've been talking a lot
about elasticities of demand,

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so you were probably
wondering, can we

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think about elasticities
of a supply?

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And, as you can imagine, the
answer is, of course we can.

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And it's interesting
to think about

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how does the percent
change in quantity supplied

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relate to percent
change in prices?

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So for example,
let's say we have

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a lemonade stand of some sort.

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So this is price on that axis.

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That is quantity on that axis.

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And let's say that
our supply curve

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looks something like that.

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Obviously, the higher the
price, the more quantity

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we're willing to supply.

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And let's say at a price of
$1, the quantity supplied

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is going to be 10.

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And this is going to
be in gallons per week.

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So the quantity
supplied is going

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to be 10 gallons per week.

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And let's say that if
the price goes to $2,

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so when the price goes
to $2, the quantity

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supplied goes to 16
gallons per week.

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So what is the elasticity
of supply roughly

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over this period
right over here?

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So the elasticity of supply.

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And you can imagine how
we're going to calculate it.

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It's going to be the percent
change in quantity supplied

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over our percent
change in price.

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So what is our percent
change in price?

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Well, we went from $1 to $2.

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So this part right over here is
going to be, we went up by $1.

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So we went up by $1 per gallon.

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So it's going to be up by $1.

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And we don't use 1, we don't use
our starting point as our base

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like we would do when we're
traditionally finding a percent

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change, because we want to
have the same present change

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whether we go from 1
to 2 as from 2 to 1.

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So instead, the convention when
we think about elasticities

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is use the midpoint
of these two or use

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the average of these two.

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So 1 plus 2 is 3, 3
divided by 2 is 1.5.

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So it's 1 over $1.50, or
you could say $1.50 is right

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in between these two things.

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And 1 over $1.50, this
is about 67% roughly.

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So this is approximately 67.

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We have approximately
a 67% change in price

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based on how we just calculated.

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Remember, we're using
the midpoint as our base.

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And then our percent change in
quantity supplied, that's this.

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So this right over here.

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We went from 10 to 16.

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So we have plus-6 over a base
of, midpoint between 10 and 16,

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is 13.

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10 plus 16 is 26,
divided by 2 is 13.

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6/13, which is going to
be 40-something percent.

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Get a calculator out.

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So we have 6 divided
by 13 gives us 46%.

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So this right over here is 46%.

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So we have, when we
had, based on the way

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we calculated it, it's
67% increase in price,

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we had a 46% increase
in quantity supplied.

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So this is a 46% increase
in quantity supplied.

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And so we could see
it's going to be 40.

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Our elasticity of supply is
going to be 46% over 67%.

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So it's going to be
something less than 1.

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So that's going to be that
divided by-- it's actually

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0.6666 and it keeps going on
forever-- gets us to 0.69.

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So this gives us an
elasticity of supply of 0.69.

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And maybe I should say
approximately 0.69,

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which tells us that we
get a smaller percent.

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At least at this price
point right over here,

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we get a smaller percent
change in quantity supplied

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than our percent
change in price.

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Now, let's think
about-- like we did

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when we thought about the
elasticities of demand--

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let's think about
different scenarios.

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So let's think about a
scenario that is inelastic,

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that is maybe
perfectly inelastic.

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So let's say that
price and quantity.

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So let's take me for example.

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I make videos.

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I love making videos.

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This is what I want to
spend my days doing.

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And I don't care
how much you pay me

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or how little you pay me.

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I guess if you paid
me enough, maybe

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I'd spend even a little bit
more time making videos.

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But let's just
assume that I don't.

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Whether you pay me a penny
a video or zero per video,

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or whether you pay
me $1,000 per video,

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I'm going to just make the same
number of videos every day.

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So this right over here is
videos per day on average.

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And this is the price per video.

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And let's say no matter
how much you pay me,

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whether you pay me nothing
or you pay me $1,000,

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I am just going to
produce, on average,

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let's just say,
three videos a day.

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So then you have
this right over here.

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You have a perfectly
inelastic supply curve.

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So this is perfectly
inelastic supply curve.

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Now, you could have
the other scenario

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where you are a farmer.

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So let me do price and quantity.

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Now, you have the other
scenario where you're a farmer

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and you can either do crop
A or crop B. Maybe it's

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corn and wheat.

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And you can easily
swap between the two.

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And let's just
assume for simplicity

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it costs you the exact same
to produce one or the other.

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So let's say that the
price of wheat per-- and

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let's say we're using
comparable units.

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So the price of
wheat is, adjusting

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for units and all of
that, let's say it's $10,

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I don't know, per bushel
or something like that.

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We just want to simplify it
for the sake of our model right

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over here.

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But this right over here,
we're thinking about the corn.

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We're thinking about corn.

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Let's say corn is right at $10.

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And right at $10, when
they're both at $10,

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I will produce-- so
let me make this clear.

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So price of corn is $10, and
the quantity of corn-- maybe,

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I don't know, I
produce 2,000 bushels.

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And I know these
prices are way off

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for what the real price per
bushel of corn or wheat is.

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And same thing.

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My quantity for wheat
right here is 2,000.

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Now, if the price of corn were
to go marginally up-- so let

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me put this.

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So this is our graph for corn.

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So this is $10 and this is 2,000
bushels per year or something.

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So let's say that's where
we are right over there.

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Now, if the price for
corn goes marginally up,

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if the price for corn goes
up to even $10.05 per bushel,

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all of a sudden, I'm going
to shift all of my wheat

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production to corn production.

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So this is going to
go to 0, and then this

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is going to go to $4,000.

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So at just $10.05, we're going
to go all the way to $4,000.

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And likewise, if this
price were to go down,

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if this were to go
to, like, $9.95,

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I would shift all of
my production to wheat

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and I wouldn't produce any corn.

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And so there you see
that the demand curve

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is getting very flat.

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And you can see, based on
very, very small percent

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changes in prices, I have
very large percent changes

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in quantity supplied.

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So this right over here is
approaching perfect elasticity.

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Huge changes in quantity
supplied, elasticity,

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for small percent
changes in price.

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Now, the cool thing about
elasticity of supply

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is it's actually much
easier to make a curve that

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has unit elasticity
or even, if you

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want to think about it,
constant elasticity.

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But if you want to
have unit elasticity,

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the easiest curve I can
draw for unit elasticity

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is going to look like this.

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Well, actually, this is the
curve for unit elasticity.

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It will literally be a
curve that looks like that.

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And the reason why
it works in this case

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is because it's upward-sloping.

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As price increases, so
does quantity increase

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for the supply curve.

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So at any point here, the two
are going to be proportional.

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So a given change in quantity
and a given change in price,

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they're going to represent
the same percentages,

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because, as price is increasing,
when you have large price

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or when you have medium price,
you have medium quantity.

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When you have large price,
you have large quantity.

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So these steps are going
to be the same percentage

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of either one of them.

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When you have small prices,
you have small quantities.

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And so it's much easier to
construct a supply curve that

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has unit elasticity than it is
to construct a normal demand

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curve that has unit elasticity.

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