Lecture Notes on Elasticity of Demand

Summary

Today's lecture focused on the concept of elasticity of demand in economics, which measures how quantity demanded of a good responds to a change in its price. We discussed different types of elasticity—inelastic, elastic, unit elastic, perfectly inelastic, and perfectly elastic—and their implications on consumer behavior and business strategies. Key concepts like the elasticity coefficient, total revenue test, and examples including gasoline were extensively covered.

Key Points from the Lecture

Introduction to Elasticity

• Elasticity of Demand: Indicates how responsive the quantity demanded is to a change in price.
• Price and Quantity Relationship: Inverse relationship where if price increases, quantity demanded decreases and vice versa.

Types of Demand Elasticity

1. Inelastic Demand

   • Quantity demanded changes slightly despite significant changes in price.
   • Example: Gasoline is often considered inelastic because there are few substitutes and it's a necessity.
   • Elasticity Coefficient: Less than 1 ((<1)).

2. Elastic Demand

   • Quantity demanded is highly responsive to changes in price.
   • Common in goods with many substitutes or luxury items.
   • Elasticity Coefficient: Greater than 1 ((>1)).

3. Unit Elastic

   • Percentage change in quantity demanded is equal to the percentage change in price.
   • Elasticity Coefficient: Equal to 1 (=1).

4. Perfectly Inelastic Demand

   • Quantity demanded does not change regardless of price changes.
   • Elasticity Coefficient: Zero (0).

5. Perfectly Elastic Demand

   • Quantity demanded is infinitely sensitive to price changes.
   • Elasticity Coefficient: Infinite.

Calculation of Elasticity

• Formula: Elasticity of Demand Coefficient = Percentage change in quantity demanded / Percentage change in price.
• Focused on absolute values due to the inverse relationship between price and quantity.

Total Revenue Test

• Importance: Helps determine how changes in price affect total revenue depending on the demand's elasticity.
• Inelastic Demand: Price increases lead to higher total revenue as the quantity decreases only slightly.
• Elastic Demand: Price increases cause a significant drop in quantity demanded, thus reducing total revenue.
• Common applications:
  • Inelastic goods seldom have sales (e.g., gasoline) because lowering prices won't significantly increase total revenue.
  • Elastic goods often have sales to boost quantity demanded and thus total revenue.

Practical Application and Examples

• Hand Gesture Method: A mnemonic to remember the effects of elasticity on total revenue.
  • "I" gesture for inelastic demand: If the price and total revenue move in the same direction.
  • No "I" gesture for elastic demand: If the price up leads to total revenue down, and price down leads to total revenue up.

Concluding Remarks

• The lecture emphasized understanding and applying the concepts of elasticity to real-world situations and business strategies.
• Future topics include cross-price and income elasticity, which will build upon the foundation laid in today's discussion.

Recommendation

Students are encouraged to review the different types of elasticity and use the total revenue test to analyze different market scenarios. Watching supplementary videos like the "Econ Movies" series may also provide more context and examples for better understanding.