Hey, you already know the law demands says there's an inverse relationship between price and quantity So the price goes up for a product people buy less the price goes down people buy more but the question now is how much less or how much more they buy and that's the idea of elasticity Elasticity shows how sensitive quantity is to a change in price what happens to quantity when there's a change in price depends a lot on the type of product first we are gonna talk about the idea of inelastic let's talk about Gasoline gasoline has inelastic demand this means when there's an increase in the price of gasoline the quantity demanded decreases, but just a little bit So when the demand is inelastic the quantity is insensitive to a change in price And it goes the other direction when the price falls the quantity demanded goes up But just a little bit. Right, you don't jump in your car when the price goes down and grab your engine At stop signs that's not what you do So when the price goes down you buy a little bit more when the price goes up you buy a little bit less insensitive to a change in price. the reason for this is because Products that have an inelastic demand have very few substitutes. When it comes to gasoline. There's nothing else I can put my car and God knows, I'm not walking I'm American. That was a joke to all you guys who are environmentalist. I apologize. I don't want to hurt your feelings I love trees. I will hug one. I love you. I love you so much In addition to having few substitutes gasoline is also a necessity, and it has elasticity coefficient that is less than one (<1) whoa coefficient! no math! can't stand math! listen, There's Gonna be a little bit of math in microeconomics But it's nothing crazy. One of the things you got to watch out for is freaking out when you hear things like coefficient It's not that hard. The elasticity of demand coefficient is the percent change in quantity, divided by the percent change in price Which is not hard at all is trying to say is that when there's a small Change in quantity when there's a big change in price, this number is less than 1 and if it's less than 1 its inelastic demand Real quick, we're talking about absolute value remember when the price goes up the quantity always goes down so we're talking about the absolute value of the elasticity of demand coefficient. The point is when there's an inelastic demand the Quantity is insensitive to a change in price. So what if demand is elastic? that means quantity is sensitive to a change in price, so right here when the price goes up the quantity decreases a whole lot, and when the price goes down the quantity demand goes up a whole lot So when the demand is elastic it means that these products have many substitutes Or they're luxuries, or they have elasticity coefficient Greater than one (>1) a big change in quantity as a result of a small change in price now, what if the percent change in quantity is exactly equal to percent change in price? Well that's something called unit elastic. unit elastic is the idea if the price goes up 20 percent, then the quantity goes down 20 percent this pops out a 1. A 1 means unit elastic What if the demand is a vertical straight line or something called perfectly inelastic? well that means an Increase in price has no effect on quantity. the quantity doesn't change so the percent change in quantity is zero whenever there's a percent change in price And so the elasticity demand coefficient is zero That's the idea perfectly inelastic And if the demand curve is horizontal Where a firm cannot change the price at all. they change the price no one's going to buy that would mean that the elasticity demand Coefficient would be infinite. all this will make more sense when you see them side by side So take a look at this. what you're looking at is five different demand curves perfectly inelastic, relatively inelastic, unit elastic, relatively elastic and perfectly elastic and you can see the elasticity coefficient is zero, Less than one, one, greater than one and infinite. this shows you the more substitutes a product has, the more sensitive it is to a change in price, the greater the elasticity demand coefficient Does it make sense? bonus round! One of the most important topics you're going to see is something called the total revenue test So this tells you what happens to total revenue when there's a change in price if the demand curve is inelastic or elastic It'll make more sense on a graph over here on the left We have inelastic demand. Right here on the right, We have elastic demand. the total revenue is the price times the quantity it's this box right here Notice how the box on both graphs starts exactly the same size. when supply shifts to the left that causes the price to go up. notice that on both curves the price goes up and the Quantity goes down. remember, the law of demand is at play here. when the price goes up the quantity goes down We're not analyzing that but we're analyzing is the total revenue The size of the box. so for inelastic demand the price went up a whole lot, but quantity decrease Just a little bit and so the size of the box got bigger that means when the demand is inelastic the price goes up the total revenue goes up or when the price goes down the total revenue goes down and that explains why gas stations never have sales Right, there's no reason for a gas station to have like a half off gas sale Because they lower their price the total revenue is not going to increase But let's take a look at elastic demand When the price goes up a whole lot of people don't want to buy it and so the size of the total revenue box gets Smaller so when the price goes up total revenue falls and when the price goes down, total revenue goes up That's why products that have elastic demand will have sales all the time. now what you're going to see on a test is a question that says if there's a Given product, Product X, and the price goes up and the total revenue goes down What must be true? The answer is it's elastic demand. right, if the price goes up and the total revenue, the box gets smaller, That's elastic demand Bonus bonus round!! one of the things I do to help students understand the total revenue test is given this thing to do with their hands so if the price goes up for product and the total revenue goes up, I look like an "I" I look like an "I" the demand is "I"nelastic right, price goes up total revenue goes up The other way to look like an "I" is when the price goes down and total revenue goes down. I look like an "I" I'm "I"nelastic demand. if the price goes up and total Revenue goes down. I don't look like an "I". I'm elastic demand. if price goes down and total revenue goes up I'm not an "I" it must be elastic demand So this is going to help you on a test if they say the price goes up for a product and the total revenue went up, you look at yourself. You look like an "I", inelastic demand. I hope this video helped you understand the idea of elasticity and the total revenue test. And make sure to subscribe And take a look at the next video that explain cross price and income elasticity. Also, check out my series of videos called Econ Movies, alright? Till next time! ENG CC By: Tammie Ng Lin Ern