all right we're back and now we're going to talk about what there's the answer what causes demand to be elastic or inelastic i wonder if as we've been going through this you kind of got an idea of it okay so why is the demand for gasoline so inelastic and gasoline is going to be one of our examples of something highly inelastic demand uh whereas apple cinnamon cheerios in our example was less inelastic it was elastic in fact well a couple of the the of the determinations is probably the biggest one is availability of close substitutes how easy is it to change to something else because typically that's our idea is that when people want something buy something to buy it because it satisfies some desire some need and so if you're choosing to purchase something else instead of that good it's because you have something else in mind right and so one of the reasons gasoline is so inelastic is there's not really any substitutes for gasoline maybe you could call metrolink tickets as a substitute for gasoline or bus rides is a substitute for gasoline but there's really no close substitute and that's one of the reasons why it's so inelastic i chose apple cinnamon cheerios specifically because i wanted to talk about a good that has a lot of close substitutes like i don't know honey nut cheerios or maple cheerios um or blueberry cheerios there's a lot do you have any idea how many cheerios there are out there i've been shocked every time i go to the grocery store and i try to get cheerios for one of my kids um there's a lot of choices out there multigrain frosted blueberry peanut butter chocolate anyway the point is that there are a lot of close substitutes so if the price of apple cinnamon cheerios all of a sudden gets way more expensive than the rest you'd expect consumers to react and switch to other cheerios the next is is it a necessity or not okay is it a necessity if it is a necessity if it's something you need you're probably going to be less flexible about to stop buying it when the price changes again gasoline is a great example of this toilet paper toothpaste right when the price of these things go up you kind of need toothpaste so you buy it anyway right so the necessity of a product is going to be a determining factor when something's really not terribly necessary like i don't know uh cotton candy i don't need cotton candy so all of a sudden cotton candy got way more expensive i think i just stopped buying cotton candy you know i don't really buy cotton candy to begin with but anyway it's not a necessity and when things are less necessary price changes people less likely to buy them imagine the price of milk doubles hard not hard to get away without milk but now imagine the point the the price of uh i was trying to come with some like keebler elf cookies keebler cookies anyway those cookies doubles i can live without them and so i'm probably not buying them whereas milk i'm kind of stuck because it's a necessity here's a tricky one the definition of a market okay so what i mean by this is we can define a similar market very narrowly or very broadly okay and here's what i mean is i could ask you the question that i just did about apple cinnamon cheerios cheerios and ask you about the elasticity of apple cinnamon cheerios now i would argue that apple cinnamon cheerios are really elastic again because of all the substitutes all the other cheerios it's also we call that a pretty narrow market we're spoken focusing on a specific brand and not even just a brand a type of brand so if i change from apple cinnamon cheerios and sorry i lost my cursor i hated it when it does this and so we change our apple cinnamon cheerios and then we change it to cheerios which of these two is gonna have more elastic demand which one's gonna have more inelastic demand the cheeros is gonna be more inelastic because whereas apple cinnamon cheerios it's easy you can switch to maple cheerios you can switch to frosted cherry i'm not going to go over the list again but you can switch to a lot of different types of cheerios if the price of all of those types of cheerios has gone up you can still switch to kicks to checks to raise and brand but you have there's less to switch to right apples and materials you could have switched to kicks you could have switched to raisin brand you could have switched to checks but you could also switch to the other types of cheerios so as we broaden the market from apple city materials which is really narrow to all kinds of cheerios our demand gets a little bit more inelastic so what if i now call it breakfast cereal and i talk about what happens if the price of breakfast cereal increases now we're talking about something that's going to have highly inelastic demand because whereas apples and materials is not a necessity cereal is a lot closer to a necessity okay whereas apple cider cheerios has a lot of close substitutes breakfast seal has less close substitutes sure oatmeal or toast is a substitute but it's not a super close substitute so as you move from that narrow market to the more broad market and again when i say that i mean what good am i talking about am i talking something specific or more broad like breakfast cereal as you go broader your demand gets more inelastic as you get more narrow your demand gets more elastic i notice now that these are not written down here like i would if i was writing on a whiteboard so if you know this in the book but you wanna you wanna pay attention to this closer substitutes less necessary narrow market those are all make things more elastic no close substitutes very necessary broad market those things make demand more inelastic okay next i have the share of a consumer's budget so it's not as simple just to say cheaper more expensive but that's kind of the idea an example i like to give is the price is a table salt so i'm talking about like the big cylinders of like morton's table salt um first of all it's a necessity but even ignoring that you know that thing in morning tables i'd probably buy one of those a year maybe two if it's a salty year but the price of one of those is what like a buck two bucks what if the price of that went ten times as expensive and became twenty dollars i buy one a year i can handle it to spend twenty dollars on it so i probably won't change my decision that much whereas if i talk about something i spend a lot of money on or a lot of my budget on so for example i spend a lot of my budget on my cell phone bill if it was 20 times more expensive first of all i'm definitely switching providers but now i'm thinking of strategies to not use a cell phone anymore right and that's kind of the idea here is that when something represents a big share of your budget then a change in that price is going to affect you if something represents a minuscule share of your budget a change that price is not a big deal okay so it's not as simple as cheaper things have more inelastic demand but that's kind of what i'm getting at because it's about how much you sort of notice it because if it's a cheap thing you buy a lot you'll notice it if it's expensive thing you buy very very rarely rarely you might not notice it as much so that's my point is that when something represents a big chunk of your ex your disposable income the amount of money you spend you're going to react when the price changes okay and so i found online it's just some estimates for price velocities demands for a few products that i wanted to show you in class what i always do is i put these up without the numbers and i'd let people put them in order so in these we see that some things elastic demand highly elastic demand tied detergent why is that highly elastic detergent is necessity but there's a lot of close substitutes tide is always right next to gain so even though there might be somebody who are loyal to tide if you have a big change in the price of tide a lot of people are going to switch over to gain or all or the up and up a brand which is what i buy uh raisin bran there's another serial example as the price of raisin bran gets more expensive there's other cereals out there so people are likely to switch grapes now we're getting to closer to unitary less elastic why is grapes um still elastic well there's other fruits out there you know some people go to the mar the grocery store like i'm getting grapes and other people go to buy produce and when you see grapes more expensive you might change bread on the other hand and again this is a narrow a broadly defined market bread if we talked about oral wheat bread we might have elastic demand but in the broadly defined market bread the price of bread at the grocery store it's really inelastic because bread is to a lot of people seen as a necessity cigarettes gasoline even more inelastic because these things don't have close substitutes you might be thinking yeah cigarettes have vaping and have smokeless tobacco but to smokers one it's a necessity and cigarettes is your is your poison of choice right and so that is why cigarettes have such inelastic demand you keep raising the taxes on cigarettes and people keep smoking them okay gasoline we're more addicted to that as a society than we are cigarettes right that's super inelastic because as the price changes you drive and the price goes up you drive the price goes down your drive you know it's not zero it's not perfectly inelastic because you know yeah at some point when prices get expensive people will start carpooling more people will start looking at ways to cut down the miles but for the most part we drive okay so i'm gonna stop this video here and i think we only have one more so i know this has been getting pretty