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Econ Videos 79 videos

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Econ: What is elasticity? 3 Views


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Description:

What is elasticity? Elasticity refers to the degree of demand to quality or price changes in the market to a product or service. Products or services that are deemed extraneous or non essential will likely exhibit elasticity with demand inversely proportional to price. Inelasticity would be prone to more essential items like iPhones and Starbucks lattes, which can rise in price while still retain demand.

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Transcript

00:00

And finance Allah Shmoop what is elasticity Socks underwear rubber

00:10

bands slingshots Olympic gymnasts What do these things have in

00:14

common while they can stretch In other words they're elastic

00:18

This concept comes up in economics It's called drum roll

00:21

Please elasticity Shocker bullet measures How much One economic variable

00:28

changes when a change is made to another economic variable

00:32

Well the most common situation has to do with demand

00:35

Like how much does demand change when there's a change

00:39

in price I eat price elasticity of demand That's how

00:43

you kind of phrase it Well think of it as

00:45

meaning or implying how far consumers will stretch their willingness

00:50

to buy as price increases like lifesaving prescription drugs Often

00:55

there's only one drug that Khun treat a specific disease

00:58

particularly rare ones out there Well don't take that drug

01:01

and you die People will pay you almost anything to

01:04

get it Items like that are said to have in

01:07

elastic demand Changes in price don't do much to dent

01:10

demand Just grab him out and it looks pretty steep

01:13

You know prices go up but demand only changes a

01:16

little tiny bit Think gasoline and cigarettes Yeah like that

01:20

You need him on the other side Of the spectrum

01:22

There are items that have highly elastic demand Little price

01:27

changes can dramatically alter whether someone is willing to buy

01:30

a product or not Graph him out on the line

01:32

looks very flat Let's take ketchup I always do It

01:36

goes great on hot dogs So we have some hotshot

01:39

new V P at Heinz ketchup and they decide the

01:42

brand name of Heinz is worth double any other crushed

01:46

tomatoes and a whole bunch of sugar Well anyway they

01:48

raise prices So heights now is six dollars for ah

01:52

big semi partial gallon of ketchup right there but the

01:56

generic Safeway brand or the generic other brand you've never

01:59

heard of There are only two dollars and fifty cents

02:02

and ketchups kind of ketchup Consumers aren't really that loyal

02:05

to it So when you raise prices who bad things

02:08

happen behind because well the loyalty that the new VP

02:12

of thought that there would be two hind sketch up

02:14

wasn't there and consumers were just fine at less than

02:17

half the price for the generic brand Yeah very elastic

02:21

demand There you raise prices a little bit and boom

02:24

volume declines All right so what affects elasticity Well the

02:28

first question asked Are there any substitutes you can buy

02:32

Prescription drugs might be highly elastic until the generic version

02:36

comes out You know kinda like the catch up thing

02:38

Right Then all of a sudden the name brand version

02:41

loses a lot of its pricing power Right Well another

02:44

key question What kind of commodity is it like Is

02:47

it a necessity or a luxury like waters A necessity

02:52

but lots of substitutes for the way you buy water

02:54

Right And how high is the price level To start

02:57

What Manufacturers can probably sneak a five percent price increase

03:01

you know on say a dollar package gun But that

03:03

same five percent price increase to a Mercedes Well that

03:07

would bump the price of it You know like several

03:10

thousand dollars right They start out at seventy grand You

03:12

raised five cents and thirty five hundred bucks Thank you

03:14

very much All right Well can you wait to buy

03:17

that car then Kenya Well if you're planning that Mercedes

03:21

purchased well you might be able to push it off

03:23

a year or two if you you know think the

03:25

price is too high Another few thousand miles on the

03:28

odometer won't affect trade in on your old crappy Volvo

03:31

car Too much so you drive However if you're broken

03:35

down by the side of the road in Death Valley

03:37

and the only tow truck driver within a hundred miles

03:39

says it will be one hundred fifty dollars to come

03:41

Get your car Well you either pay or you know

03:44

start walking How long you have The product also plays

03:47

into the price elasticity of demand Disposable products can be

03:51

pretty cheap and elastic in terms of price right Think

03:54

those disposable plastic razors in Scooby Doo Band aids and

03:59

you know packs of gum But if you can get

04:01

a long term used out of something while the price

04:04

could be higher think stuff like refrigerators or cop water

04:07

heaters and well yeah that Mercedes luxury Your income is

04:11

another factor in determining elasticity as well All right going

04:14

back to Mercedes here a five percent increase in the

04:16

car price might put it out of your range Well

04:18

what if we go with the used Ford Fiesta Yeah

04:22

well I'd save you a whole bunch of money It

04:23

was fun to drive But then if wealthier Jeff Bezos

04:26

richest man in the world for that five percent increase

04:29

wouldn't even register Pete by the Mercedes anyway the way

04:32

the rest of us by a hamburger for lunch And

04:35

then well he might use it as a flowerpot in

04:37

his backyard So a lot goes into price elasticity Unfortunately

04:40

economists have an equation for all this stuff to figure

04:43

out something's elasticity while we take the percentage change in

04:46

the quantity of something and divide it by the percentage

04:49

change in the price when different prices and demand levels

04:53

and curved shapes are involved here So if the result

04:56

gets you a number greater than or equal to one

04:59

in this little graph equation here then that product is

05:02

considered elastic meaning a change in price is highly sensitive

05:06

It has a notable effect on demand You raise it

05:09

a little bit in demand shrinks those easy to find

05:12

products where there are a lot of potential substitutes Yeah

05:15

they're usually highly elastic They compete on price Remember the

05:19

great ketchup dilemma Yeah that's got an elasticity greater than

05:23

one And then there's the other side of the coin

05:24

If you run the last two city equation and get

05:26

a result less than one Well then you've got an

05:29

elastic product Consumers don't change how much they purchase one

05:32

Prices rise Well think about gasoline We're not talking about

05:36

the price of anyone station You know if the place

05:38

by your house jacks up prices well you'll just drive

05:41

around the block and goto cheaper place right But if

05:43

gas in general skyrockets like say there's a revolution in

05:48

the Middle East or if hurricane takes out all the

05:50

oil rigs in the Gulf of Mexico Well then gas

05:53

prices all over the world spike But what do you

05:56

do You know that's you grumble You complain you post

05:58

mean Twitter comments about gas state Asian owner but ultimately

06:02

you drive on over and pump the gas Well you

06:04

don't have much of a choice here for normal people

06:06

in normal gas powered cars That's inelastic demand even when

06:10

there are big moves in price while you find a

06:13

way to pay it In other words well you're about

06:15

as flexible in that regard as that gymnast I do

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