in the last video we showed how to calculate out the price elasticity of demand let's dig a bit deeper into this concept i'm going to draw two demand curves here one fairly flat and one fairly steep the key intuition is that when we're looking at two demand curves the flatter one is more elastic why let's look at a small price change so here is the old price the old and here is a new price p new under the old price this was the quantity let me actually do this in this color and under the new price this is the quantity so this small price change causes a big change in quantity we may not know the exact elasticity of this curve but let's compare to the steeper demand curve that i drew here a small price change here the same price change leads to a small change in quantity even a big price change wouldn't change quantity very much quantity doesn't respond very much to price here so this is an inelastic demand curve inelastic and this one here is elastic here's the change in quantity and here's this change in quantity now what determines how elastic a demand curve is first there's availability of substitutes if there are a lot of other things you could easily buy instead of this product then small changes in price will affect the amount demanded a lot but if there are few or no substitutes then demand is likely to be inelastic for example the demand for pizza is likely to be fairly elastic since there are a lot of substitutes like tacos but the demand for gasoline is going to be fairly inelastic since there's not a lot of other things we can use to drive our cars two is the definition of the market the concept of substitutes is related to this idea the demand for pizza from a particular restaurant is going to be more elastic than the demand for pizza overall pizza from one restaurant is a close substitute to pizza from another restaurant similarly gasoline at one gas station is a very close substitute for gas from another one so the demand for a particular station's gas will be more elastic than for gasoline overall third is need the more that a good is a necessity the more inelastic its demand will be the demand for life-saving medicines will be very inelastic the quantity demanded won't change very much when the price changes but the demand for say app downloads is likely to be much more elastic because it's a luxury they're not really that important fourth is the share of the budget the share of your budget the demand for a good is generally more elastic the larger a share of the consumer's budget it takes up if a product costs very little and only takes up a tiny share of your budget then even a large relative increase in its price may not change demand very much for example an increase in the price of a one dollar pen that you replace every school year probably won't change your demand very much fifth adjustment time in general the longer the time horizon the more elastic demand is gasoline prices are a great example of this if gas prices double tomorrow quantity demanded would definitely go down but in the longer run people would be more likely to carpool make different choices about where they live and work and purchase more fuel-efficient vehicles the quantity demanded will be more responsive in the long run so here are some examples of the price elasticity of demand from economic research so the price elasticity of demand for cars is just a little bit under two and remember that's an absolute value for coca-cola it's about 1.22 the price elasticity of demand for wine is about one for bread it's about 0.4 residential water that is water in your home is about 0.38 so about similar elasticity as bread but interestingly the price elasticity of demand for beer is less elastic than residential water and gasoline in the short run the elasticity is very close to inelastic perfectly inelastic at 0.06 very inelastic now in the next video we'll take a look at some special cases of price elasticity including some extensions like how responsive demand is to the changes in prices of other goods or your income