hi everybody the basic law of demand states on the price goes up quantity demanded will decrease when the price goes down quantity demanded will increase yeah but how much exactly that's much more important information to know isn't it well that's where price elasticity of demand comes in PE d the definition is this it measures the responsiveness of quantity demanded given a change in price and we can actually use an equation to get a number for PV here is the equation so PV equals the percentage change in quantity demanded over the percentage change in price and it's very important he remember it's that way around quantity demanded on the top price on the bottom just remember you queue before you P hours with my wife the other day we were going to the theater and she had to queue ages before she managed to get to the loop saying when we went to Orlando we were doing all the theme parks in Orlando great times but again every time she mid the knew she had to queue before she peed right queue before you pee especially if you're a female that's just like it a given thing so just you queue before you pee happy days well not happy days necessarily but at least you'll get the equation right that's the most important thing we need to work with percentage changes here so in case we have raw numbers and they need to be converted to percentage change it's the difference between the two numbers divided by the original number and times by a hundred then stick in the numbers into this equation and we'll get a number at the end the number of the enthalpy D will always be negative because of the law of demand if price goes up positive quantity demand will fall and negative we get a negative number or as the price goes down negative quantity demand will go up positive we get a negative number at the end so the negative sign isn't really that important when we got our final number you can almost ignore this sign well you can ignore this sign still write it in but then forget about it just look at the number and then use this to help you interpret the number so if that number is greater than 1 demand is price elastic and that means now for any given price change there is a greater proportionate change in quantity demanded so for example price might fall by 5 percent but quantity demanded goes up by a 15 percent you see quantity demanded is changed by more than the price change that means that the man price elastic the figure is less than one demand this price inelastic which means that when the price changes quantity demand will change but proportionately less than the change in price I take the same price decrease of 5% quantity demand will increase maybe on about one percent right if it's zero demand is perfectly price inelastic which means regardless of the price change quantity demanded won't change at all if it's infinity these are two extremes by the way with infinity demand is perfectly priced elastic if it's one demand is unit price elastic okay so these these two extremes one isn't really that important but useful when we're looking at total revenue the key is the first two right here so let's now use all of this that we've learned so far and do some calculations let's go with the first example we've got the price of a pack of cigarettes increasing from 4 pounds to 5 pounds let's immediately convert that to percentage change remember our equation for percentage change and the difference between the two numbers here is one pound divided by the original which is 4 times by 100 that's a 25 percent increase in price quantity demanded of cigarettes in packages goes down from 150 235 the difference is 15 divided by the original 150 times by a hundred that's a 10 percent decrease in quantity demanded do this calculation and we get a final figure of - nor point for now given the numbers or we've already learned that means that demand is price inelastic in words what does that mean it means that as the price of cigarettes goes up in this case quantity demanded goes down but proportionately less than the increase in price that's what demand is price inelastic means what about number two price of a sofa goes down from 1,000 pounds to 800 pounds or a meter I can tell you that's a 20% decrease in price and you can't see that immediately use the equation the difference is 200 divided by a thousand times 100 you'll get 20% decrease always with an idea to keep the negative in the equation that way you will always get the negative at the end you'll write that down which is important quantity demanded of sofas now goes up from two thousand to three thousand eight hundred let's convert that Center changed differences 1800 / 2000 times by a hundred and that will give you from 90% that's a 90% increase in quantity demanded work that out so when we compute that we get a final figure of minus 4.5 remember when we interpret the figure we can ignore the minus sign the figure is great in the 1 which means demand is price elastic demand for sofas here is price elastic meaning as the price of surfers goes down in this case quantity demanded increases but proportionally more than the decrease in price 90 percent compared to a 20 percent drop in price the demand increases proportionally more than the decrease in price good to have a go some numbers there let's go back now and understand more theory so we know how to do the calculations how do we then draw demand curves depending on elasticity of demand well if we work out that demand is price inelastic you have to draw a steep looking demand clevon is very clear you look at this steep domenica whenever we change price the change in quantity demanded will be proportionately less no matter what the price goes up or down if demand is pricey lastly you draw the demand curve shallow like that there and that means for any change in price the proportionate change in quantity demanded will be much greater so a shallow de banker for the extremes of perfectly price inelastic demand vertical line for perfectly price elastic demand horizontal line like that simple stuff learn their shapes very easy to apply so then the next question is when is demand for a good or service price elastic or price inelastic just remember splat what a useful memory device I tell you till the day I still use splat it's so helpful so let's understand the S stands for substitutes specifically the number of substitutes the more substitutes there are the more price inelastic demand is going to be the less substitutes the more price inelastic demand is going to be think the primary commodity is like coffee like rubber like copper like oil all of these things there are very few substitutes available which makes demand for them very price inelastic the percentage of income that a price change takes the greater the person of income that a price change takes the more price elastic demand is going to be the smaller the percentage of income a price change takes the more price elastic demand is going to be so let's take a 10% increase in the price of cars versus a 10% increase in the price of an apple well a 10% increase in the price of an apple could be something like 5 pence well that's not going to affect our demand usually demand is going to be price inelastic for that reason whereas a 10% increase in the price of cars can be like a 2,000 pound increase in price that's a huge chunk of our income so demand is going to be more price elastic for cars there is it a luxury or necessity luxuries tend to have more price inelastic demand necessity is more price inelastic demand I think that's pretty clear it's the good addicted or is it habit for me if it's addictive again the price goes up quantity demanded will fall but maybe not by very much so demand is price inelastic the good is addicted thing cigarettes things have alcoholic drinks is that how it formally good like stamp collecting again demand will be price inelastic if that's the case and then think of the time period in the short run demand miss price inelastic because there are a few substitutes available consumers maybe don't have much time to look for alternatives even if they do exist whereas in the long run demand is much more price elastic as more substitutes become available so that covers PD perfectly stay tuned for the next video guys when we look at the link between PD and total revenue very important for a business hopefully now you can smash PD I'll see you in the next video