Total revenue and elasticity

WEBVTT
Kind: captions
Language: en

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So we're going back to
our little burger stand

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where we had our demand curve
in terms of burgers per hour.

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And now, I want to
think about something

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from the perspective
of our burger stand.

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And think about,
at any given point

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on this demand curve, how much
revenue would we get per hour.

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And when I talk about revenue,
for simplicity, let's just

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think that's really just
how much total sales will

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I get in a given hour.

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So let me just write
over here total revenue.

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Well, the total
revenue is going to be

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how much I get per burger times
the number of burgers I get.

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So the amount that I
get per burger is price.

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So it's going to
be equal to price.

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And then the total number
of burgers in that hour

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is going to be the quantity.

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Pretty straightforward.

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If I sell 10 things
at $5, I am going

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to get $50 of revenue,
$50 of sales in that hour.

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Now, let's think about
what the total revenue will

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look like at different
points along this curve

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right over here.

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And actually, let me just
make a table right over here.

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So I'll make one column
price, one column quantity.

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And then let's make one
column total revenue.

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So let's look at a
couple scenarios here.

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Well, we could actually
look at some of these points

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that we already have defined.

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At point A over
here, price is 9.

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So I'll do it in
point A's color.

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Prices is 9.

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Quantity is 2. $9 times
2 burgers, $9 per burger

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times 2 burgers per hour.

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Your total revenue
is going to be $18.

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And you can see it
visually right over here.

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This height right
over here is 9.

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And this width right
over here is 2.

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And your total
revenue is going to be

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the area of this rectangle.

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Because the height is the price.

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And the width is the quantity.

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So that total revenue is
the area right over there.

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Now, let's go to point--
let me do a couple of them

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just to really make
it clear for us.

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Let's try to point
B. So at point B

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when our price is 8 and our
quantity is 4, 4 per hour.

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Our total revenue is
going to be 8 times 4

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which is $32 per hour.

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And once again, you
can see that visually.

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The height here is 8.

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And the width here-- so the
height of this rectangle is 8.

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And the width is 4.

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The total revenue is
going to be the area.

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It's going to be the height
times the width just like that.

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Now, let's go to a point that I
haven't actually graphed here.

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Actually, let me
just-- actually,

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I'll go through all the
points just for fun.

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So now at point C, we have 5.50.

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5.50 is a price.

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The quantity is 9.

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9 times 5.50.

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9 times 5 is $45.

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And you have another 4.50.

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So that is 49.50.

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So once again, it's going to
be the area of this rectangle.

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Area of that rectangle
right over there.

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So you might already be
noticing something interesting.

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As we lower the price, at least
in this part of our demand

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curve, as we lower the
price, we are actually

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increasing not just
the quantity were

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increasing the total revenue.

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Let's see if this
keeps happening.

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So if we go to point D, I'll
do it in that same color.

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We have 4.50.

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And we are selling 11 units.

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So 11 times 4.50.

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Let's see, this is going
to be 44 plus 5.50.

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Once again, that is 49.50.

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So that this rectangle is
going to have the same area

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as that pink one that we
just did for scenario C.

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And I'll actually just
do one more down here,

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just to see what happens.

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Because this is interesting.

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Now we lower the price.

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And it looks like things
didn't change much.

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And now, let's go-- let's
just do one more point

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actually for the sake of time.

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Point E. And I encourage
you to try other ones.

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Try F on your own.

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Point E, my price
is $2 per burger.

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My quantity is 16
burgers per hour.

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I sell a total of 32 burgers.

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Now actually, let's
just do the last one, F,

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just to feel a
sense of completion.

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So $1 per burger.

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I sell 18 burgers per hour.

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My total revenue, when you
multiply them, is $18 per hour.

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And once again, that's the
area of this rectangle,

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this short and fat
rectangle right over here.

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And E was the area--
the total revenue in E

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was the area of that
right over there.

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And you could graph
these just to get

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a sense of how total
revenue actually

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changes with respect
to price or quantity.

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Lets plot the total revenue
with respect to quantity.

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So let's try it out.

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So if you-- let me plot it out.

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So this is going to
be total revenue.

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And this axis right over
here is going to be quantity.

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And we're going to, once
again, go from-- let's see.

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This is 0.

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This is 5.

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This is 10.

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This is 15.

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And this is 20 right over here.

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And then total revenue.

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Let's see, it gets as high--
it gets pretty close to 50.

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So let's go.

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This is 10 20, 30, 40, and 50.

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So that's 50, 40,
30, 20, and 10.

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So when our quantity is
2, and our price is 9.

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Well, we don't have price on
this axis right over here.

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But when our quantity is
2, our total revenues 18.

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So it's going to be
something like there.

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Then, when our quantity is
4, our total revenue is 32.

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Right about there.

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Then, when our quantity is 9,
our total revenue is almost 50.

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So right over there.

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And then, when
it's 11, it's also

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at that same point
right over there.

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And then, when we are quantity
is 16, our total revenues 32.

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16.

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So 32.

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Right there.

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And then finally, when
our quantity is 18,

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our total revenue is 18.

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And what you see is
that it's plotting out

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a curve that looks like this.

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And if you remember
some of your algebra 2,

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this is a concave downwards
parabola right over here.

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And you can see
there was actually

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some point at which you could
maximize your total revenue.

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And if you really tried
all the points here,

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you would see that
maximum point is

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if you tried this point
right over here, right

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at price 5 and quantity 10.

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At price 5 and quantity 10, in
that hour, you would sell $50.

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So this is the maximum
point right over there $50.

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Now, the whole reason why
I'm talk think about this.

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I could have talked about this
independently of any discussion

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of elasticity just to see how
total revenue relates to price

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and quantity at different
points on the demand curve.

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But there is an
interesting relationship.

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In that very first
video, and we actually

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used this exact
demand curve for it.

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When we explored
elasticity, we saw

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that up here at this
part of the curve--

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let me do this in
a different color.

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At this point of the curve in
orange for any change-- when

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you do a change in your price
since the prices are pretty

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high, that is a much
lower percent change

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in price than the impact
that you get on quantity.

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Because over here, although
they look like they're close.

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Or I should say the absolute.

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For every 1 that down
we move in price,

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we're moving 2 up quantity.

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But that 1 down in price is a
very small percentage of price

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because our prices
are high here.

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And it's a very large percentage
of quantity right over here.

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So you get huge changes
in percent quantity

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for very small changes in price
in this part of the curve.

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So this part of the
curve is elastic.

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Or you could say that its
price elasticity for demand

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is greater than 1.

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You get larger changes
in percent quantity

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for a given change
in percent price.

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Now, these parts of the
curve down here, we saw

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is the opposite's happening.

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You move 1 down, 1
unit down in price,

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you move 2 units to
the right in quantity.

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But over here, price
is a much lower.

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So this is a much larger
percentage change in price.

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And this is a much smaller
percentage change in quantity.

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So you get large
percentage changes

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in price for small percentage
change in quantity.

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That means that here, you
are relatively inelastic.

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And then right over here,
right at this point,

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right in this region,
right over here,

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we saw that we
had unit-- we were

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unit elastic right over there.

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So there's an interesting
relationship going on.

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While we were, so
while we were elastic,

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this part right over
here, when we lowered

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price in this region.

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While we were elastic,
when we lowered price,

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we got increases in revenue.

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So let me write this down.

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And this is generally,
too, there's

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a couple of boundary
cases on the math that

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make it a little bit, you
can't make it absolutely true.

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But while we are elastic, at
the elastic points of our demand

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curve, a decrease in price.

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Price goes down.

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Total revenue was going up.

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You do a price cut on this
part of the demand curve,

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you get more revenue.

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Then, when you are at unit
elasticity, what was happening?

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At unit elasticity, you were
right at this point right

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over here.

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Right at this point over here.

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And roughly, when
you do a price cut--

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and I'm going to say
this is roughly true--

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your total revenue
stays constant.

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But just right at
that point, right

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when you're going through
that unit elasticity point.

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And then finally, when you are
inelastic when a large percent

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changes in price result and
not so large percent change

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is in quantity demanded, then
a price change going down

00:10:51.190 --> 00:10:53.910
resulted in lower total revenue.

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Resulted in total
revenue going down.

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And this should, hopefully,
make a little bit

00:10:59.030 --> 00:11:00.390
of intuitive sense.

00:11:00.390 --> 00:11:04.450
Because over here, this
point, if given percent

00:11:04.450 --> 00:11:07.570
change in price, you were
getting a larger percent

00:11:07.570 --> 00:11:08.740
change in quantity.

00:11:08.740 --> 00:11:11.050
So the percent in
price went down.

00:11:11.050 --> 00:11:13.710
Your percent in
quantity grew even more.

00:11:13.710 --> 00:11:16.280
So you made up any
decrease in height

00:11:16.280 --> 00:11:17.990
with a increase in width.

00:11:17.990 --> 00:11:19.680
So your area increased.

00:11:19.680 --> 00:11:22.890
Down here, your decrease
in percent price

00:11:22.890 --> 00:11:27.140
wasn't made up for a
decrease in quantity.

00:11:27.140 --> 00:11:31.100
So when you made your
rectangles little bit shorter,

00:11:31.100 --> 00:11:33.360
you didn't, we weren't
able to compensate

00:11:33.360 --> 00:11:35.270
by growing the width as much.

00:11:35.270 --> 00:11:39.673
And so you actually had a lower
area, lower total revenue.


More on total revenue and elasticity

WEBVTT
Kind: captions
Language: en

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I want to do one more video
on total revenue and price

00:00:03.620 --> 00:00:04.770
elasticity of demand.

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Just to make sure that you, the
relationship between the two

00:00:07.970 --> 00:00:09.550
is an intuitive one.

00:00:09.550 --> 00:00:12.100
So let's draw an
arbitrary demand curve.

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So this is my price axis.

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That is my quantity
demanded axis.

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Quantity axis.

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And let me just draw an
arbitrary demand curve

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right over here.

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So let's say that
is my demand curve.

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And let's pick some
price and quantities

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on this demand curve.

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So let's say that
the price is up here.

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Let's call that P1.

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And then, the quantity demanded.

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Let's call that Q1.

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And we already know
that the total revenue

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is the area of this
rectangle right over here.

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This is the total revenue.

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It's just the price
times the quantity.

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If I'm selling 2 burgers an
hour and for $9 a burger,

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I'm going to make $18 per hour.

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That's going to be this
area right over here.

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Now, let's assume in
this part of the curve

00:01:06.280 --> 00:01:12.360
that the price elasticity
of demand is greater than 1.

00:01:12.360 --> 00:01:13.765
So we are elastic.

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So let me write this.

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So the price, the elasticity
of demand-- actually,

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I should say the absolute value
of the elasticity of demand.

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It will be actually
be a negative number.

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But the absolute value of
the elasticity of demand

00:01:24.480 --> 00:01:37.610
is greater than 1 which means
for a 1% drop in price you have

00:01:37.610 --> 00:01:49.060
more, you have a greater
than 1% increase in quantity.

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And that comes straight
out of the expression

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or our formula for
what elasticity is.

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Remember, elasticity
is our percent change

00:01:58.100 --> 00:02:04.360
in quantity over
percent change in price.

00:02:04.360 --> 00:02:06.820
So if this, if the
absolute value of this

00:02:06.820 --> 00:02:09.370
is greater than 1-- these
move in opposite directions.

00:02:09.370 --> 00:02:10.703
That's why it would be negative.

00:02:10.703 --> 00:02:13.400
But if we say the absolute
value of this is greater than 1,

00:02:13.400 --> 00:02:15.610
that means that this
quantity is going

00:02:15.610 --> 00:02:17.600
to be larger than this quantity.

00:02:17.600 --> 00:02:20.120
So if we have a
1% drop in price,

00:02:20.120 --> 00:02:24.180
the change in our quantity is
going to be greater than 1%.

00:02:24.180 --> 00:02:29.170
And so for point right over
here, if we lower this by 1%,

00:02:29.170 --> 00:02:34.520
we're going to increase
this by more than 1%.

00:02:34.520 --> 00:02:38.120
So any drop in our any
reduction in our height

00:02:38.120 --> 00:02:39.739
will be more than made up for.

00:02:39.739 --> 00:02:41.030
And this is generally the case.

00:02:41.030 --> 00:02:44.990
Will be more than made up for
by an increase in our width.

00:02:44.990 --> 00:02:48.120
So total revenue will increase.

00:02:48.120 --> 00:02:53.720
So when price drops, so 1% drop
in price and a larger than 1%

00:02:53.720 --> 00:03:00.380
increase in quantity means
that total revenue will go up.

00:03:00.380 --> 00:03:02.280
Now, if we go down here.

00:03:02.280 --> 00:03:04.160
If we go down to this
part of the curve.

00:03:04.160 --> 00:03:08.340
And let's say that this-- let's
call this-- let's call that P2.

00:03:08.340 --> 00:03:11.460
And let's call that quantity 2.

00:03:11.460 --> 00:03:15.790
And then, this area right over
here would be total revenue 2.

00:03:15.790 --> 00:03:18.020
Let's call that total
revenue 1 over there.

00:03:18.020 --> 00:03:20.097
Price times the quantity.

00:03:20.097 --> 00:03:21.430
Now, what's happening over here?

00:03:21.430 --> 00:03:25.240
We're going to assume that our
price elasticity of demand,

00:03:25.240 --> 00:03:28.960
the absolute value of it
over here, is less than 1.

00:03:28.960 --> 00:03:32.080
So the absolute value of our
price elasticity of demand

00:03:32.080 --> 00:03:34.900
is less than 1 at this
point in the curve.

00:03:34.900 --> 00:03:36.990
And all that is a
fancy way of saying

00:03:36.990 --> 00:03:46.605
that for a 1% drop in price,
we get less than a 1% drop.

00:03:51.060 --> 00:03:53.020
Sorry, less than a 1% increase.

00:03:53.020 --> 00:03:54.900
They move in
opposite directions.

00:03:54.900 --> 00:03:59.980
1% increase in quantity.

00:03:59.980 --> 00:04:02.310
So we're lowering the height.

00:04:02.310 --> 00:04:06.220
If we have a 1% drop,
we're lowering that by 1%.

00:04:06.220 --> 00:04:09.890
But we're not getting a
1% increase in our width.

00:04:09.890 --> 00:04:12.560
So the width isn't going
to be increasing that much.

00:04:12.560 --> 00:04:14.910
So in general, this
is going to result

00:04:14.910 --> 00:04:17.170
in a lowering of this area.

00:04:17.170 --> 00:04:18.550
This area will get smaller.

00:04:18.550 --> 00:04:20.910
We're reducing our
height more than we

00:04:20.910 --> 00:04:22.590
are expanding our width.

00:04:22.590 --> 00:04:28.790
So in this situation, total
revenue would go down.

00:04:28.790 --> 00:04:31.690
And remember, this is
an elastic situation.

00:04:31.690 --> 00:04:34.800
So when it is elastic, total
revenue tends to go up.

00:04:34.800 --> 00:04:38.450
And when it is
inelastic-- I want to say,

00:04:38.450 --> 00:04:41.490
when it's elastic
a drop in price

00:04:41.490 --> 00:04:43.860
tends to make total
revenue go up.

00:04:43.860 --> 00:04:51.020
And when it is inelastic,
a drop in price

00:04:51.020 --> 00:04:54.720
tends to make total
revenue go down.

00:04:54.720 --> 00:04:56.700
And then, you can imagine,
right when you're it

00:04:56.700 --> 00:04:59.750
unit elasticity,
someplace around there,

00:04:59.750 --> 00:05:05.200
a 1% a drop in price
will result in exactly 1%

00:05:05.200 --> 00:05:08.410
increase in quantity demanded.

00:05:08.410 --> 00:05:10.000
And so they will trade off.

00:05:10.000 --> 00:05:16.710
You won't get a noticeable
change in your revenue.

00:05:16.710 --> 00:05:20.525
And the reason why I say that
is that actually some, many econ

00:05:20.525 --> 00:05:23.150
textbooks will tell you that you
don't get a change in revenue.

00:05:23.150 --> 00:05:25.817
But if you actually will do a
detailed look at that math--

00:05:25.817 --> 00:05:26.900
let me write it over here.

00:05:26.900 --> 00:05:29.450
So the absolute value
of the price elasticity

00:05:29.450 --> 00:05:31.760
of demand at that point is 1.

00:05:31.760 --> 00:05:36.580
Which tells us that
a 1% drop in price

00:05:36.580 --> 00:05:42.910
will, or goes along with
a 1% increase in quantity.

00:05:42.910 --> 00:05:44.290
But if you look at the math.

00:05:44.290 --> 00:05:45.450
So if the old area.

00:05:45.450 --> 00:05:48.140
So let's call this price 3.

00:05:48.140 --> 00:05:51.670
And let's call this
quantity 3 right over here.

00:05:51.670 --> 00:05:54.944
And so total revenue
3-- let me do

00:05:54.944 --> 00:05:58.840
this in a new color-- which
is this area right over there,

00:05:58.840 --> 00:06:03.530
is going to be equal to
price 3 times the quantity 3.

00:06:03.530 --> 00:06:08.630
Now, if we increase price by,
or if we decrease price by 1%,

00:06:08.630 --> 00:06:13.510
then this will become
0.99 times our price.

00:06:13.510 --> 00:06:16.000
And if we increase
our quantity by 1%,

00:06:16.000 --> 00:06:20.820
then this will become
1.01 times our quantity.

00:06:20.820 --> 00:06:23.530
Now, let's think about what
this number right over here is.

00:06:23.530 --> 00:06:25.450
And this is why I'm
saying it's not exactly,

00:06:25.450 --> 00:06:28.220
the total revenues aren't
going to be exactly unchanged.

00:06:28.220 --> 00:06:35.010
If you multiply 0.99 times 1.01,
you don't you get exactly 1.

00:06:35.010 --> 00:06:37.150
You don't get exactly 1.

00:06:37.150 --> 00:06:40.290
Another way to think
about it, 0.99 times 0.01

00:06:40.290 --> 00:06:44.800
is going to be 1%
less than 1.01.

00:06:44.800 --> 00:06:48.050
And 1% of 1.01 is
slightly larger than 1.

00:06:48.050 --> 00:06:49.540
Or another way to
think about it,

00:06:49.540 --> 00:06:53.150
this value is going to
be 1% larger than 0.99.

00:06:53.150 --> 00:06:56.790
And 1% larger than, 1%
of a 0.99 is less than 1.

00:06:56.790 --> 00:06:58.010
So it's not going to get a 1.

00:06:58.010 --> 00:07:00.060
And you can see it
with your calculator.

00:07:00.060 --> 00:07:05.820
0.99 times 1.01 gets
you to very close to 1.

00:07:05.820 --> 00:07:15.900
So this is going to be equal
to 0.9999 times P3 Q3, which

00:07:15.900 --> 00:07:23.530
is equal to 0.9999
times total revenue 3.

00:07:23.530 --> 00:07:26.710
But it is-- total revenue 3.

00:07:26.710 --> 00:07:30.790
But it is roughly unchanged.

00:07:30.790 --> 00:07:33.170
So we can-- that's the
general rule of thumb.

00:07:33.170 --> 00:07:39.800
So when you are at
unit elasticity,

00:07:39.800 --> 00:07:45.570
then, a decrease in
price roughly says,

00:07:45.570 --> 00:07:50.727
no change, approximately
no change in total revenue.

00:07:50.727 --> 00:07:52.810
So I just wanted to make
sure that it makes sense.

00:07:52.810 --> 00:07:54.393
It really just comes
from these areas.

00:07:54.393 --> 00:07:56.875
If you're reducing
the height by a less

00:07:56.875 --> 00:07:58.250
than you're
increasing the width,

00:07:58.250 --> 00:08:01.000
obviously, the area
is going to increase.

00:08:01.000 --> 00:08:04.110
Or most of the
cases, I should say.

00:08:04.110 --> 00:08:05.790
It depends on where you are.

00:08:05.790 --> 00:08:08.530
If you are, if
you're compensating,

00:08:08.530 --> 00:08:11.539
whatever you reduce the height,
you are compensating perfectly

00:08:11.539 --> 00:08:13.330
with the increase in
width, then you're not

00:08:13.330 --> 00:08:14.930
going to have a
change in revenue.

00:08:14.930 --> 00:08:17.826
And if you decrease
the height by more,

00:08:17.826 --> 00:08:19.450
if you're taking more
area from the top

00:08:19.450 --> 00:08:21.283
than you're adding on
the width, then you're

00:08:21.283 --> 00:08:24.900
going to have a total
decrease in total revenue.


Perfect inelasticity and perfect elasticity of demand

WEBVTT
Kind: captions
Language: en

00:00:00.640 --> 00:00:03.780
To get a better intuition for
the price elasticity of demand,

00:00:03.780 --> 00:00:07.180
I thought I would take a look at
some of the more extreme cases

00:00:07.180 --> 00:00:10.800
and think about what types
of elasticities of demand

00:00:10.800 --> 00:00:11.920
we would see.

00:00:11.920 --> 00:00:15.820
So this right over here
is a vial of insulin.

00:00:15.820 --> 00:00:18.390
Many diabetics, not all
diabetics, but many diabetics

00:00:18.390 --> 00:00:19.750
need to take insulin daily.

00:00:19.750 --> 00:00:22.331
They need to inject it in order
to maintain their blood sugar

00:00:22.331 --> 00:00:22.830
level.

00:00:22.830 --> 00:00:25.650
If they don't do it, bad things
will happen to their body.

00:00:25.650 --> 00:00:27.630
And they might even
prematurely die

00:00:27.630 --> 00:00:30.330
if they don't take
their insulin on time.

00:00:30.330 --> 00:00:33.170
So let's think about what
the elasticity of demand

00:00:33.170 --> 00:00:35.430
might look like for
something like insulin.

00:00:35.430 --> 00:00:37.540
So in one column,
I'll put price.

00:00:37.540 --> 00:00:40.610
And in the other column,
I will put quantity.

00:00:40.610 --> 00:00:42.520
So let's say that
insulation right now

00:00:42.520 --> 00:00:46.100
is going for $5 a vial.

00:00:46.100 --> 00:00:49.320
And we have a group of
diabetics who need insulin.

00:00:49.320 --> 00:00:51.670
And they're all going to
buy the insulin they need.

00:00:51.670 --> 00:00:53.200
And let's say, in
this group, that

00:00:53.200 --> 00:00:57.870
turns out to be
100 vials per week.

00:00:57.870 --> 00:00:59.370
So this is in vials per week.

00:01:02.299 --> 00:01:03.840
Fair enough, that's
exactly what they

00:01:03.840 --> 00:01:06.236
need to do to maintain
their insulin.

00:01:06.236 --> 00:01:07.860
Now, what happens if
the price changes?

00:01:07.860 --> 00:01:10.010
What happens if the
price were to go down?

00:01:10.010 --> 00:01:13.160
Let's say the price
were to go down to $1.

00:01:13.160 --> 00:01:15.070
Well, what would
the quantity be?

00:01:15.070 --> 00:01:17.779
Well, they're not going
to buy any more insulin.

00:01:17.779 --> 00:01:19.820
They're going to buy just
what they need in order

00:01:19.820 --> 00:01:21.379
to maintain their diabetes.

00:01:21.379 --> 00:01:23.170
And remember, we're
holding all else equal.

00:01:23.170 --> 00:01:26.020
We're not assuming any change
in expectations of price.

00:01:26.020 --> 00:01:27.960
They expect price go
up or down or anything

00:01:27.960 --> 00:01:29.620
like that So in
this case, they'll

00:01:29.620 --> 00:01:32.580
still just by 100 vials.

00:01:32.580 --> 00:01:34.514
Now, what happens if
the price went up a ton?

00:01:34.514 --> 00:01:35.930
And what happens
if the price went

00:01:35.930 --> 00:01:39.580
to-- what happens if
we went to $100 a vial.

00:01:39.580 --> 00:01:41.460
Well, it would be hard for them.

00:01:41.460 --> 00:01:42.802
But they need it to survive.

00:01:42.802 --> 00:01:44.760
So it's going to squeeze
out any other expenses

00:01:44.760 --> 00:01:46.320
that they need to
spend money on.

00:01:46.320 --> 00:01:50.390
And so they still will
buy 100 vials a week.

00:01:50.390 --> 00:01:52.920
And so you could keep
raising price, within reason.

00:01:52.920 --> 00:01:54.720
And they would still
buy the same quantity.

00:01:54.720 --> 00:01:56.770
Obviously, if you
raise it to $1 billion,

00:01:56.770 --> 00:01:58.895
then they would just wouldn't
be able to afford it.

00:01:58.895 --> 00:02:02.210
But within reason, they're
going to buy 100 vials per week,

00:02:02.210 --> 00:02:04.340
no matter what the price is.

00:02:04.340 --> 00:02:07.630
So this is an example
of perfect inelasticity.

00:02:16.200 --> 00:02:18.550
Another way, so if you think
of the physical analogy

00:02:18.550 --> 00:02:20.430
that we talked about
with elasticity.

00:02:20.430 --> 00:02:21.360
It's like a brick.

00:02:21.360 --> 00:02:24.430
It doesn't matter how much,
within reason once again,

00:02:24.430 --> 00:02:26.240
any amount of force
pulling or pushing

00:02:26.240 --> 00:02:27.730
that a human could
put on a brick,

00:02:27.730 --> 00:02:28.771
it's not going to change.

00:02:28.771 --> 00:02:30.870
It's not going to deform
the brick in any way.

00:02:30.870 --> 00:02:34.070
And likewise, any change
in price within reason,

00:02:34.070 --> 00:02:36.570
within reason here,
isn't going to change

00:02:36.570 --> 00:02:37.700
the demand in any way.

00:02:37.700 --> 00:02:39.740
It's perfectly inelastic.

00:02:39.740 --> 00:02:41.690
And if you want to
do the computation,

00:02:41.690 --> 00:02:44.960
you could look at inelas-- you
could figure out the demand

00:02:44.960 --> 00:02:46.670
elasticity for, let's
say, when you're

00:02:46.670 --> 00:02:50.260
going from a price of $5 to $1.

00:02:50.260 --> 00:02:53.550
So the price went down by 4.

00:02:53.550 --> 00:02:58.070
And the quantity changed by 0.

00:02:58.070 --> 00:03:01.380
So your percent
change in quantity,

00:03:01.380 --> 00:03:09.230
so delta percent-- I'll write
it-- percent change in quantity

00:03:09.230 --> 00:03:10.710
is equal to 0.

00:03:10.710 --> 00:03:13.120
And then, your percent is
going to be over your percent

00:03:13.120 --> 00:03:18.880
change in price if you
use the averaging method.

00:03:18.880 --> 00:03:23.019
It was-- it would be going down
by 4 over an average of 250.

00:03:23.019 --> 00:03:24.310
It'll be a fairly large number.

00:03:24.310 --> 00:03:26.520
But at 0 over anything
is still going to be 0.

00:03:26.520 --> 00:03:28.850
So it doesn't matter what
that thing is over here.

00:03:28.850 --> 00:03:34.570
Your elasticity of demand
in this situation is 0.

00:03:34.570 --> 00:03:37.180
And if you wanted to see
what this demand curve would

00:03:37.180 --> 00:03:39.770
look like, let's plot it.

00:03:39.770 --> 00:03:42.850
So this right over
here is my price axis.

00:03:42.850 --> 00:03:46.560
And that is my quantity axis.

00:03:46.560 --> 00:03:48.480
And so no matter
what, let's say this

00:03:48.480 --> 00:03:52.130
is a quantity of 100
of vials per week.

00:03:52.130 --> 00:03:56.970
That's true when
the price is $5.

00:03:56.970 --> 00:03:59.680
So that's true in the prices $5.

00:03:59.680 --> 00:04:02.420
They're going to demand
100 vials a week.

00:04:02.420 --> 00:04:04.600
That's true when
the price is $1.

00:04:04.600 --> 00:04:06.990
They're going to demand
100 vials a week.

00:04:06.990 --> 00:04:10.300
And that's true, if the price
is $20 or $100 or whatever.

00:04:10.300 --> 00:04:13.590
They're going to demand
100 vials a week.

00:04:13.590 --> 00:04:17.750
And so a perfectly
inelastic demand curve

00:04:17.750 --> 00:04:19.230
would look like this.

00:04:19.230 --> 00:04:21.149
It is a vertical line.

00:04:21.149 --> 00:04:23.550
It doesn't matter
what price you pick.

00:04:23.550 --> 00:04:26.010
The quantity demanded
is always going

00:04:26.010 --> 00:04:28.640
to be the exact same thing.

00:04:28.640 --> 00:04:30.670
Now, let's go to
another extreme.

00:04:30.670 --> 00:04:32.670
So this is perfectly inelastic.

00:04:32.670 --> 00:04:33.430
You can imagine.

00:04:33.430 --> 00:04:35.200
Well, what is perfectly elastic.

00:04:35.200 --> 00:04:38.670
Something that changes a lot
if you have a small percentage

00:04:38.670 --> 00:04:39.707
change in price.

00:04:39.707 --> 00:04:42.040
And to think about that, let's
look at these two vending

00:04:42.040 --> 00:04:42.550
machines.

00:04:42.550 --> 00:04:45.410
And you see that they
both do sell cans of Coke.

00:04:45.410 --> 00:04:46.900
That's a can of Coke there.

00:04:46.900 --> 00:04:49.350
That is can of Coke there.

00:04:49.350 --> 00:04:51.800
And let's say, starting
off, the can of Coke,

00:04:51.800 --> 00:04:54.120
let's say that they cost
$1 in each vending machine.

00:04:58.349 --> 00:05:00.390
And we're going to assume
that this one, remember

00:05:00.390 --> 00:05:01.350
all else equal.

00:05:01.350 --> 00:05:04.630
So we're going to assume
that this vending machine

00:05:04.630 --> 00:05:06.140
right over here doesn't change.

00:05:06.140 --> 00:05:09.840
Does not change.

00:05:09.840 --> 00:05:12.480
So it's just going to
be consistently charging

00:05:12.480 --> 00:05:14.475
$1 for a can of Coke.

00:05:14.475 --> 00:05:16.100
And they're sitting
next to each other.

00:05:16.100 --> 00:05:17.650
And it looks like they have
a little coffee machine

00:05:17.650 --> 00:05:19.270
in between right over here.

00:05:19.270 --> 00:05:21.250
So let's think about
the demand curve

00:05:21.250 --> 00:05:24.980
for this, for Coca Cola
in this vending machine

00:05:24.980 --> 00:05:26.090
right over here.

00:05:26.090 --> 00:05:28.090
So let's think about the
price and the quantity.

00:05:28.090 --> 00:05:33.620
So I'll do-- let me do price
column and quantity demanded.

00:05:33.620 --> 00:05:35.990
So let's say if the price is $1.

00:05:35.990 --> 00:05:42.860
So if the price is $1,
then just odds are,

00:05:42.860 --> 00:05:45.240
it's going to get about
half of the sales per week.

00:05:45.240 --> 00:05:49.050
And let's say that ends
up being, I don't know,

00:05:49.050 --> 00:05:52.100
let's say that ends
up being 100 cans.

00:05:52.100 --> 00:05:53.480
This is in cans per week.

00:05:57.570 --> 00:05:58.354
Now what happens?

00:05:58.354 --> 00:05:59.770
And let me put
some decimals here.

00:05:59.770 --> 00:06:01.289
So this is $1.00.

00:06:01.289 --> 00:06:02.080
The price is $1.00.

00:06:02.080 --> 00:06:03.420
It sells 100 cans per week.

00:06:03.420 --> 00:06:04.961
And probably this
one also would also

00:06:04.961 --> 00:06:06.520
sell about 100 cans per week.

00:06:06.520 --> 00:06:09.310
Now, what happens if we have
a very, very small change

00:06:09.310 --> 00:06:10.870
in price.

00:06:10.870 --> 00:06:15.770
So if we change, if we go
from $1.00, instead of $1.00,

00:06:15.770 --> 00:06:20.890
we are at $0.99.

00:06:20.890 --> 00:06:22.470
What's going to happen?

00:06:22.470 --> 00:06:24.810
So this, remember, this
machine right over here

00:06:24.810 --> 00:06:25.600
is not changing.

00:06:25.600 --> 00:06:27.970
This is-- we're talking--
our demand curve is

00:06:27.970 --> 00:06:30.420
for the quantity of Cokes
sold from this machine.

00:06:30.420 --> 00:06:32.750
And the price was
for this machine.

00:06:32.750 --> 00:06:35.340
So if this machine is
even a penny cheaper.

00:06:35.340 --> 00:06:37.780
And assuming that people,
there aren't lines forming

00:06:37.780 --> 00:06:39.630
and things like
that, people are just

00:06:39.630 --> 00:06:41.274
always going to go
to this machine.

00:06:41.274 --> 00:06:43.190
If it's easy enough, if
there's no difference,

00:06:43.190 --> 00:06:44.981
they're always going
to go to this machine.

00:06:44.981 --> 00:06:48.090
So this machine will be able to
get, will sell all the Cokes.

00:06:48.090 --> 00:06:51.956
So it's going to sell 200 Cokes.

00:06:51.956 --> 00:06:54.580
Now, what happens if, instead of
lowering the price by a penny,

00:06:54.580 --> 00:06:56.140
you raise the price by a penny.

00:06:56.140 --> 00:06:59.267
So instead of $1.00,
your at $1.01.

00:06:59.267 --> 00:07:01.850
Well, now everyone's going to
go to the other vending machine.

00:07:01.850 --> 00:07:03.933
They're going to say, oh,
we don't-- even a penny,

00:07:03.933 --> 00:07:05.610
might as well walk to this one.

00:07:05.610 --> 00:07:07.510
Assuming everything
else is equal.

00:07:07.510 --> 00:07:11.300
So then, they're
going to sell 0.

00:07:11.300 --> 00:07:14.540
And so what would the
demand curve look like here.

00:07:14.540 --> 00:07:15.555
Let's plot it out.

00:07:18.200 --> 00:07:20.440
So this is the price.

00:07:20.440 --> 00:07:24.200
This right over, this axis
right over here is quantity.

00:07:24.200 --> 00:07:26.180
And this is in cans per week.

00:07:26.180 --> 00:07:27.960
And so this is 0.

00:07:27.960 --> 00:07:30.690
This is 100.

00:07:30.690 --> 00:07:32.510
And then, this is 200.

00:07:32.510 --> 00:07:35.040
And then this is a price of $1.

00:07:35.040 --> 00:07:36.570
That's $1.

00:07:36.570 --> 00:07:41.290
So at $1, the quantity
demanded is 100 cans.

00:07:41.290 --> 00:07:42.380
Fair enough.

00:07:42.380 --> 00:07:46.650
Now, at $0.99, the quantity
demanded is 200 cans.

00:07:46.650 --> 00:07:50.090
So at $0.99, the
quantity demanded is 200.

00:07:50.090 --> 00:07:53.910
So $0.99 is right
below that, it's 200.

00:07:53.910 --> 00:07:55.670
So it's right over there.

00:07:55.670 --> 00:07:58.470
It's like right, right,
there's a little bit lower.

00:07:58.470 --> 00:08:00.180
And $1.01 a little
bit over here,

00:08:00.180 --> 00:08:03.710
the quantity demanded is 0.

00:08:03.710 --> 00:08:13.060
So the demand curve here is
looks something like that.

00:08:13.060 --> 00:08:15.740
So it's going to be
almost horizontal.

00:08:15.740 --> 00:08:18.950
So it's going to be approaching
perfect elasticity, very

00:08:18.950 --> 00:08:23.520
small changes in price end
up with these huge changes,

00:08:23.520 --> 00:08:27.110
huge changes in percent
quantity demanded.

00:08:27.110 --> 00:08:29.590
And I courage to work
out the math to see here,

00:08:29.590 --> 00:08:32.905
that you will get a very
large number for elasticity.

00:08:32.905 --> 00:08:34.280
And so something
that is, this is

00:08:34.280 --> 00:08:36.039
approaching perfect elasticity.

00:08:36.039 --> 00:08:39.059
A truly perfect
elasticity would be

00:08:39.059 --> 00:08:43.140
something that is
a horizontal line.

00:08:43.140 --> 00:08:47.280
So in this case, so over here,
our elasticity of demand--

00:08:47.280 --> 00:08:50.220
and I'll talk about the
absolute value of it, is 0.

00:08:50.220 --> 00:08:52.450
And over here,
the absolute value

00:08:52.450 --> 00:08:55.700
of our elasticity of
demand is infinity.

00:08:55.700 --> 00:08:58.450
'50 Because, remember, it's
percent change in quantity

00:08:58.450 --> 00:09:00.050
over percent change in price.

00:09:00.050 --> 00:09:03.070
When you go from either,
from one scenario to another

00:09:03.070 --> 00:09:06.030
over here, you're percent
change in price is very small.

00:09:06.030 --> 00:09:09.450
It's roughly about 1% in this
scenario right over here.

00:09:09.450 --> 00:09:12.260
Changing the price
up or down about 1%.

00:09:12.260 --> 00:09:14.710
But then, you see your
quantity is changing, depending

00:09:14.710 --> 00:09:15.876
on which one you're looking.

00:09:15.876 --> 00:09:19.380
Your quantity is changing
on the order of 50% to 100%,

00:09:19.380 --> 00:09:21.050
from that 1% change in price.

00:09:21.050 --> 00:09:22.976
So you have a huge
elasticity of demand here.

00:09:22.976 --> 00:09:25.100
It would be a real-- it
would actually be a number.

00:09:25.100 --> 00:09:27.640
But as you can imagine, as
it becomes more and more

00:09:27.640 --> 00:09:29.290
sensitive, as quantity
demanded becomes

00:09:29.290 --> 00:09:32.060
more and more sensitive to
a percent change in price,

00:09:32.060 --> 00:09:34.040
this curve is going to
flatten out completely.

00:09:34.040 --> 00:09:36.720
And you will have an
infinite, absolute value

00:09:36.720 --> 00:09:40.480
of your elasticity of demand.


More on elasticity of demand

WEBVTT
Kind: captions
Language: en

00:00:00.677 --> 00:00:01.852
What I want to do in this video is

00:00:01.852 --> 00:00:04.224
focus a little bit more on the results of the last video.

00:00:04.224 --> 00:00:07.799
Make sure that they make intuitive and mathematical sense to us

00:00:07.799 --> 00:00:10.307
because something slightly strange happened.

00:00:10.307 --> 00:00:13.724
We had a linear demand curve right over here,

00:00:13.724 --> 00:00:17.726
which means for any given change in price right over here.

00:00:17.726 --> 00:00:19.116
So in all of the examples,

00:00:19.116 --> 00:00:22.149
whether we went from A to B or C to D or E to F,

00:00:22.149 --> 00:00:25.349
we had a $1 drop in price.

00:00:25.349 --> 00:00:30.126
we had a $1 drop in price.....a $1 drop in price.

00:00:30.126 --> 00:00:32.228
And every time we had a $1 drop in price

00:00:32.228 --> 00:00:34.188
we had a $2 increase, oh sorry,

00:00:34.188 --> 00:00:37.362
we had a 2 unit increase in quantity demanded.

00:00:37.362 --> 00:00:40.734
So we had a 2 unit increase in quantity demanded.

00:00:40.734 --> 00:00:43.030
This is a linear demand curve.

00:00:43.030 --> 00:00:48.331
But despite the fact that for each dollar drop in price,

00:00:48.331 --> 00:00:50.319
we had the same increase in quantity demanded.

00:00:50.319 --> 00:00:53.275
The slightly maybe un-intuitive thing that happened

00:00:53.275 --> 00:00:55.598
was that we had a slight, we had a different -

00:00:55.598 --> 00:00:58.740
actually very different elasticity of demand.

00:00:58.740 --> 00:01:00.177
And you might imagine that

00:01:00.177 --> 00:01:01.872
it probably had something to do with the fact that

00:01:01.872 --> 00:01:03.792
elasticity of demand is based on

00:01:03.792 --> 00:01:09.407
% change in quantity relative to % change in prices,

00:01:09.407 --> 00:01:12.168
instead of just change in quantity over change in price.

00:01:12.168 --> 00:01:14.538
If it was just change in quantity over change in price,

00:01:14.538 --> 00:01:16.838
we would get something...it would be constant.

00:01:16.838 --> 00:01:19.468
But we saw very very different results.

00:01:19.468 --> 00:01:21.337
When you look closely at these,

00:01:21.337 --> 00:01:25.455
so let's focus on this region between A and B right over here,

00:01:25.455 --> 00:01:27.391
we had a $1 change in price.

00:01:27.391 --> 00:01:30.669
Our $1 change in price was on a relatively large base,

00:01:30.669 --> 00:01:32.087
our price was already high.

00:01:32.087 --> 00:01:35.153
Remember we used to figure out the % change,

00:01:35.153 --> 00:01:37.068
we use a dollar over the average,

00:01:37.068 --> 00:01:38.876
the average of our 2 points.

00:01:38.876 --> 00:01:40.464
so we don't do $1 over 9

00:01:40.464 --> 00:01:42.700
because then we would have a different elasticity

00:01:42.700 --> 00:01:44.584
when we went from A to B

00:01:44.584 --> 00:01:46.150
then when we went from B to A.

00:01:46.150 --> 00:01:48.042
A dollar over 9 versus a dollar over 8

00:01:48.042 --> 00:01:49.908
would give you 2 different percentages.

00:01:49.908 --> 00:01:52.090
Instead we say a dollar over eight and a half.

00:01:52.090 --> 00:01:55.547
So this per price % change was in the teens

00:01:55.547 --> 00:02:00.122
while this quantity % change is going to be with 67%

00:02:00.122 --> 00:02:03.698
2 over an average quantity of 3

00:02:03.698 --> 00:02:05.480
in this region right over here.

00:02:05.480 --> 00:02:07.557
So you had a relatively large,

00:02:07.557 --> 00:02:09.786
actually quite large % change in quantity

00:02:09.786 --> 00:02:13.492
over relatively small % change in price.

00:02:13.492 --> 00:02:16.203
67% over something that's in,

00:02:16.203 --> 00:02:19.171
roughly in the mid-teens percentage.

00:02:19.171 --> 00:02:22.933
And so that's why the absolute value of our elasticity of demand

00:02:22.933 --> 00:02:24.651
was a relatively large number.

00:02:24.651 --> 00:02:26.426
If you don't think about the absolute value,

00:02:26.426 --> 00:02:27.287
you get a negative number

00:02:27.287 --> 00:02:31.052
because this is a downward sloping line.

00:02:31.052 --> 00:02:32.972
But if you focus on the absolute value,

00:02:32.972 --> 00:02:35.926
it's a - the magnitude of it- is a relatively large number,

00:02:35.926 --> 00:02:39.174
a relatively large % change in quantity

00:02:39.174 --> 00:02:41.635
relative to your % change in price.

00:02:41.635 --> 00:02:43.713
And it all comes out of, your quantities are low here.

00:02:43.713 --> 00:02:45.787
So if you move 2 on a low base,

00:02:45.787 --> 00:02:48.199
you are going to have a large % change in quantity

00:02:48.199 --> 00:02:50.334
and your prices are relatively high here.

00:02:50.334 --> 00:02:53.666
So a change in 1 isn't going to be that large of a percentage.

00:02:53.666 --> 00:02:55.892
But what you have,

00:02:55.892 --> 00:02:58.831
when your absolute value of your elasticity of demand

00:02:58.831 --> 00:03:01.693
is greater than 1, like it is right over here,

00:03:01.693 --> 00:03:04.884
so when your absolute value of your elasticity of demand

00:03:04.884 --> 00:03:06.542
is greater than 1,

00:03:06.542 --> 00:03:09.791
it's usually called, at this point in the curve,

00:03:09.791 --> 00:03:15.386
is ELASTIC or generally elastic. So this is elastic.

00:03:15.386 --> 00:03:18.028
You get some nice % movements in quantity

00:03:18.028 --> 00:03:20.830
for given % change in price.

00:03:20.830 --> 00:03:24.318
Then when you go over here, our prices have gone -

00:03:24.318 --> 00:03:26.055
our prices are lower

00:03:26.055 --> 00:03:28.407
when we are in this region between C and D.

00:03:28.407 --> 00:03:30.536
So that dollar difference is going to be

00:03:30.536 --> 00:03:32.578
a larger % change in price

00:03:32.578 --> 00:03:34.528
and our quantities are higher,

00:03:34.528 --> 00:03:37.902
so that $2 change is going to be a lower change in quantity,

00:03:37.902 --> 00:03:39.836
and actually end up being the same thing,

00:03:39.836 --> 00:03:41.465
because you have a dollar change in price

00:03:41.465 --> 00:03:44.094
over an average base of 5, right?

00:03:44.094 --> 00:03:46.758
The average between 5.50 and 4.50 is 5.

00:03:46.758 --> 00:03:50.846
So if you have a 20% change in price, a 20% drop in price,

00:03:50.846 --> 00:03:54.504
and you have a 20% increase in quantity -

00:03:54.504 --> 00:03:58.108
a 20% increase in quantity.

00:03:58.108 --> 00:04:00.365
So let me write, this isn't the teens over here,

00:04:00.365 --> 00:04:02.926
my writing fitting is too small so I won't do that.

00:04:02.926 --> 00:04:04.785
So you have a 20% change in price

00:04:04.785 --> 00:04:06.550
and a 20% increase in quantity.

00:04:06.550 --> 00:04:09.999
That's 20% because you have 2 over the average here.

00:04:09.999 --> 00:04:12.961
2 over 10, so 20% increase.

00:04:12.961 --> 00:04:16.423
So that's why your elasticity of demand or

00:04:16.423 --> 00:04:19.793
the magnitude of your elasticity of demand is exactly 1.

00:04:19.793 --> 00:04:23.303
And if your magnitude of your elasticity of demand is exactly 1,

00:04:23.303 --> 00:04:26.852
we say that you have UNIT ELASTICITY at that point,

00:04:26.852 --> 00:04:29.030
elasticity.

00:04:29.030 --> 00:04:30.980
And then finally if you go all the way down here,

00:04:30.980 --> 00:04:34.040
our prices end up being quite low -

00:04:34.040 --> 00:04:35.496
our prices are quite low

00:04:35.496 --> 00:04:39.948
so a dollar change is actually a huge % price change, right?

00:04:39.948 --> 00:04:44.700
Our average base here is $1.50 in this region right over here.

00:04:44.700 --> 00:04:47.191
And so a dollar over a $1.50.

00:04:47.191 --> 00:04:54.541
It's a huge, it's actually a 67% change in price.

00:04:54.541 --> 00:04:57.978
67, yep that's right. yeah $1 is a 2/3 change in price.

00:04:57.978 --> 00:04:59.970
it's a huge % change in price.

00:04:59.970 --> 00:05:02.909
But once again now our quantity is much larger

00:05:02.909 --> 00:05:06.080
so $2 increase isn't that large of a change in quantity.

00:05:06.080 --> 00:05:09.100
So you have a smaller % change in quantity

00:05:09.100 --> 00:05:11.387
over a large % change in price.

00:05:11.387 --> 00:05:14.154
So that just means you're relatively inelastic.

00:05:14.154 --> 00:05:17.194
You are not getting a lot of change in quantity

00:05:17.194 --> 00:05:20.617
for the magnitude of your change in price.

00:05:20.617 --> 00:05:21.782
So if your -

00:05:21.782 --> 00:05:25.004
If the magnitude of the elasticity of demand

00:05:25.004 --> 00:05:27.138
is less than 1 over here,

00:05:27.138 --> 00:05:30.984
we call that either relatively inelastic or just inelastic.

00:05:30.984 --> 00:05:34.588
In...elas...tic.

00:05:34.588 --> 00:05:36.210
So I'll leave you there in this video,

00:05:36.210 --> 00:05:38.854
and just I want you to really kind of internalize

00:05:38.854 --> 00:05:40.581
what we're doing here, especially with the maths.

00:05:40.581 --> 00:05:43.804
And especially understanding why the elasticity is changed here.

00:05:43.804 --> 00:05:46.003
Get you thinking in terms of percentages.

00:05:46.003 --> 00:05:48.585
And also make you, hopefully you'll appreciate

00:05:48.585 --> 00:05:51.341
why we're taking the average of these 2 points.

00:05:51.341 --> 00:05:54.306
When we find the denominator for the percentages

00:05:54.306 --> 00:05:56.600
instead of just taking 1 of the 2 points,

00:05:56.600 --> 00:05:58.405
we get the same elasticity of demand

00:05:58.405 --> 00:06:01.000
either direction we go in.


Price elasticity of demand using the midpoint method

WEBVTT
Kind: captions
Language: en

00:00:00.360 --> 00:00:02.340
What we're going to
think about in this video

00:00:02.340 --> 00:00:07.110
is elasticity of
demand-- tis-sit-tity,

00:00:07.110 --> 00:00:10.890
elasticity of demand.

00:00:10.890 --> 00:00:13.010
And what this is,
is a measure of how

00:00:13.010 --> 00:00:17.410
does the quantity demanded
change given a change in price?

00:00:17.410 --> 00:00:21.060
Or how does a change in price
impact the quantity demanded?

00:00:21.060 --> 00:00:34.207
So change in price--
impact quantity--

00:00:34.207 --> 00:00:36.040
want to be careful
here-- quantity demanded.

00:00:36.040 --> 00:00:37.210
When you talk about
demand, you're

00:00:37.210 --> 00:00:38.460
talking about the whole curve.

00:00:38.460 --> 00:00:41.530
Quantity demanded is a specific
quantity-- quantity demanded.

00:00:44.590 --> 00:00:48.070
And the way that we, as
economist-- I'm not really

00:00:48.070 --> 00:00:50.174
an economist, but since
we're doing economics,

00:00:50.174 --> 00:00:51.590
we could pretend
to be economists.

00:00:51.590 --> 00:00:54.270
The way that
economists measure this

00:00:54.270 --> 00:01:03.380
is they measure it as a
percent change in quantity

00:01:03.380 --> 00:01:09.870
over a percent-- over the
percent change in price.

00:01:09.870 --> 00:01:12.040
And the reason why they do
this, as opposed to just,

00:01:12.040 --> 00:01:15.059
say, change in quantity
over change in price,

00:01:15.059 --> 00:01:17.600
is because if you did change in
quantity over change in price

00:01:17.600 --> 00:01:20.240
you would have a number that's
specific to the units you're

00:01:20.240 --> 00:01:20.740
using.

00:01:20.740 --> 00:01:22.865
So it would depend on
whether you're doing quantity

00:01:22.865 --> 00:01:25.290
in terms of per hour, or
per week, or per year.

00:01:25.290 --> 00:01:27.950
And so you would have different
numbers based on the time

00:01:27.950 --> 00:01:30.360
frame, or the units,
that you might use.

00:01:30.360 --> 00:01:34.980
But when you use a percentage
it is a unitless number.

00:01:34.980 --> 00:01:37.220
Because the percentage--
you're taking a change

00:01:37.220 --> 00:01:40.100
in some quantity,
divided by that quantity.

00:01:40.100 --> 00:01:43.260
So the units themselves
actually cancel out.

00:01:43.260 --> 00:01:45.370
And the reason why it's
called elasticity--

00:01:45.370 --> 00:01:47.740
this might make some sense
to you-- or the reason

00:01:47.740 --> 00:01:49.850
why I like to think
it's called elasticity,

00:01:49.850 --> 00:01:52.020
is I imagine something
that's the elastic.

00:01:52.020 --> 00:01:54.710
Like a elastic band
or a rubber band.

00:01:54.710 --> 00:01:57.110
And in the rubber
band, if you pull it,

00:01:57.110 --> 00:02:00.430
depending if something--
so let's say this one

00:02:00.430 --> 00:02:01.060
is inelastic.

00:02:06.320 --> 00:02:09.160
So if you pull, you're not
going to able to pull it much.

00:02:09.160 --> 00:02:10.440
It's going to be fairly stiff.

00:02:10.440 --> 00:02:12.150
It's not going to stretch a lot.

00:02:12.150 --> 00:02:14.540
While something is
elastic-- if something

00:02:14.540 --> 00:02:16.770
is elastic for a given
amount of force--

00:02:16.770 --> 00:02:18.660
so this is for a given
amount of force--

00:02:18.660 --> 00:02:20.284
you're not able to pull it much.

00:02:20.284 --> 00:02:21.700
And if something
is elastic, maybe

00:02:21.700 --> 00:02:23.500
for the same amount
of force, you're

00:02:23.500 --> 00:02:27.200
going to be able
to pull it a lot.

00:02:27.200 --> 00:02:30.050
So this right over
here is elastic.

00:02:30.050 --> 00:02:33.150
And so the analogy, maybe,
might make a little bit sense--

00:02:33.150 --> 00:02:34.890
relative to applied
price and demand.

00:02:34.890 --> 00:02:38.130
Something is elastic-- so
let me write this down.

00:02:40.930 --> 00:02:43.760
So let me write, very elastic.

00:02:43.760 --> 00:02:50.810
If a given change in
price-- given price change

00:02:50.810 --> 00:02:54.460
you have-- and we'll talk about
percentages in a little bit.

00:02:54.460 --> 00:02:57.080
But a given change in price,
you have a large change

00:02:57.080 --> 00:02:59.046
in demand-- so large
percentage change.

00:02:59.046 --> 00:03:00.920
And let me just speak
in terms of percentage.

00:03:00.920 --> 00:03:07.260
Given a percentage
change in P, you

00:03:07.260 --> 00:03:13.140
end up having a large
percentage change in Q.

00:03:13.140 --> 00:03:14.290
That would be very elastic.

00:03:14.290 --> 00:03:16.770
So you could imagine
the P is like the force,

00:03:16.770 --> 00:03:20.290
and the Q, the
quantity demanded,

00:03:20.290 --> 00:03:24.962
is how far the thing
can get stretched apart.

00:03:24.962 --> 00:03:26.920
And that's why we would
call this very elastic.

00:03:26.920 --> 00:03:29.200
Just like a very
elastic rubber band.

00:03:29.200 --> 00:03:35.580
And if something is very
inelastic, if given a percent

00:03:35.580 --> 00:03:45.780
change in P, you have a
small percent change in Q.

00:03:45.780 --> 00:03:49.420
So just like a rubber band--
for a given amount of force,

00:03:49.420 --> 00:03:52.120
if you're not able to
pull it much at all,

00:03:52.120 --> 00:03:53.330
then it's inelastic.

00:03:53.330 --> 00:03:55.250
If you're able to pull
a lot, it's elastic.

00:03:55.250 --> 00:03:58.530
Same thing with
price and quantity.

00:03:58.530 --> 00:04:03.610
For a given change in price, if
the percent quantity demanded

00:04:03.610 --> 00:04:05.720
changes a lot-- very elastic.

00:04:05.720 --> 00:04:08.810
If it doesn't change a
lot-- very inelastic.

00:04:08.810 --> 00:04:10.310
Now, with that out
of the way, let's

00:04:10.310 --> 00:04:12.980
actually calculate
the elasticity

00:04:12.980 --> 00:04:17.260
for multiple points along this
demand curve right over here.

00:04:17.260 --> 00:04:19.510
And I think that will give
us a bit better grounding.

00:04:19.510 --> 00:04:24.055
Especially because there are a
little slightly-- I would call

00:04:24.055 --> 00:04:27.320
them unusual ways of calculating
the percent change in quantity

00:04:27.320 --> 00:04:29.034
and the percent
change of price--

00:04:29.034 --> 00:04:30.700
just so that we get
the same number when

00:04:30.700 --> 00:04:32.550
we have a positive
change in price.

00:04:32.550 --> 00:04:34.300
And the same as we get
the negative change

00:04:34.300 --> 00:04:37.440
in price-- or a negative and a
positive-- or a drop in price

00:04:37.440 --> 00:04:39.820
and an increase in price.

00:04:39.820 --> 00:04:41.870
So let me give myself
some real estate over here

00:04:41.870 --> 00:04:44.370
because I want to do
some actual mathematics.

00:04:44.370 --> 00:04:47.880
And actually all of this we will
be reviewing in what I'm about

00:04:47.880 --> 00:04:50.320
do, and it will give me some
real estate to work with.

00:04:50.320 --> 00:04:52.160
So let me clear all of that.

00:04:52.160 --> 00:04:54.689
And let me clear is
that right over here.

00:04:54.689 --> 00:04:56.230
And what I'm going
to do is I'm going

00:04:56.230 --> 00:04:59.340
to calculate the
elasticity of demand

00:04:59.340 --> 00:05:03.040
at several points along this
demand curve right over here.

00:05:03.040 --> 00:05:05.380
And so the first one,
I will do it at point A

00:05:05.380 --> 00:05:07.870
to point B. So let me
make another column

00:05:07.870 --> 00:05:10.175
right over here--
elasticity of demand.

00:05:10.175 --> 00:05:11.550
And actually,
we're going to have

00:05:11.550 --> 00:05:14.080
one column that's
elasticity of demand.

00:05:14.080 --> 00:05:16.674
So it's a big E with a little
subscript D. And the other one,

00:05:16.674 --> 00:05:18.090
I'll just take its
absolute value.

00:05:18.090 --> 00:05:20.340
Because, depending
on-- sometimes

00:05:20.340 --> 00:05:22.510
people like to just
think of the number,

00:05:22.510 --> 00:05:24.494
which will tend to
be a negative number.

00:05:24.494 --> 00:05:25.910
And sometimes,
people like to look

00:05:25.910 --> 00:05:27.220
at the absolute value of it.

00:05:27.220 --> 00:05:30.640
So we'll look at both and
see what it actually means.

00:05:30.640 --> 00:05:33.570
So let's say our price
drops from point A

00:05:33.570 --> 00:05:35.940
to point B. So from
point A to point

00:05:35.940 --> 00:05:41.800
B we have a $1-- a negative
$1 change in price.

00:05:41.800 --> 00:05:44.670
And we have a positive--
so this is a negative $1

00:05:44.670 --> 00:05:45.850
change in price.

00:05:45.850 --> 00:05:48.980
And we have a
positive $2-- sorry--

00:05:48.980 --> 00:05:54.450
a positive two burger per hour
change in quantity demanded.

00:05:54.450 --> 00:05:56.834
So what is the elasticity
of demand there?

00:05:56.834 --> 00:05:58.000
So let's write it over here.

00:05:58.000 --> 00:05:59.860
I'll do it in A's color.

00:05:59.860 --> 00:06:03.170
So the elasticity
of demand, remember,

00:06:03.170 --> 00:06:06.260
it's the percent
change in quantity.

00:06:06.260 --> 00:06:08.610
So percent change in
quantity-- I'll rewrite it.

00:06:08.610 --> 00:06:13.520
It's the percent
change in quantity

00:06:13.520 --> 00:06:20.210
over percent change in price.

00:06:20.210 --> 00:06:24.240
And so we have-- what's our
percent change in quantity?

00:06:24.240 --> 00:06:27.770
So it's going to be the change
in quantity over some base

00:06:27.770 --> 00:06:28.640
quantity.

00:06:28.640 --> 00:06:30.550
So our change in
quantity is two.

00:06:30.550 --> 00:06:34.350
So it's going to be
equal to 2 over-- now

00:06:34.350 --> 00:06:37.020
in traditional terms-- and this
is what I want to, kind of,

00:06:37.020 --> 00:06:39.620
clarify-- is a little bit
unusual in how we do it.

00:06:39.620 --> 00:06:42.890
But we do it, so that we get
the same elasticity of demand

00:06:42.890 --> 00:06:44.780
whether we go from
A to B or B to A.

00:06:44.780 --> 00:06:46.690
Or essentially, we get
the same elasticity

00:06:46.690 --> 00:06:49.770
of demand along this
whole part of the curve.

00:06:49.770 --> 00:06:51.640
Instead of just
dividing the change

00:06:51.640 --> 00:06:54.492
in quantity divided by
our starting point, what

00:06:54.492 --> 00:06:55.950
I want to do is
I'm going to divide

00:06:55.950 --> 00:07:00.290
the change in quantity divided
by the average of our starting

00:07:00.290 --> 00:07:01.550
and our ending, points.

00:07:01.550 --> 00:07:04.220
So that's going to be 2
over-- and I'll actually

00:07:04.220 --> 00:07:05.340
do the math explicitly.

00:07:05.340 --> 00:07:06.345
Actually, no, let's
just think about it.

00:07:06.345 --> 00:07:07.910
What's the average
between 2 and 4.

00:07:07.910 --> 00:07:10.670
Well, the average is
just going to be 3.

00:07:10.670 --> 00:07:13.530
That's the average of 2 and 4.

00:07:13.530 --> 00:07:17.180
Let me write it down
to, just so it's clear.

00:07:17.180 --> 00:07:21.780
That right over here
is 2 plus 4 over 2.

00:07:21.780 --> 00:07:22.750
That's how you get 3.

00:07:22.750 --> 00:07:24.541
That's how you would
calculate the average.

00:07:27.570 --> 00:07:30.120
So that is our
proportionate change.

00:07:30.120 --> 00:07:33.160
And then you want to
multiply by 100-- times 100--

00:07:33.160 --> 00:07:35.500
to actually get a percentage.

00:07:35.500 --> 00:07:37.330
And then, what is
our change in price?

00:07:37.330 --> 00:07:40.550
Well we're going to do the
same thing, or the percent

00:07:40.550 --> 00:07:41.590
change in price.

00:07:41.590 --> 00:07:44.040
Our change in price
is negative 1.

00:07:44.040 --> 00:07:47.960
It is negative 1 over-- and
once again, we don't just

00:07:47.960 --> 00:07:50.460
do negative 1 divided
by 9, we do it

00:07:50.460 --> 00:07:53.120
over the average of 8 and 9.

00:07:53.120 --> 00:07:57.190
And the average
of 8 and 9 is 8.5.

00:07:57.190 --> 00:08:00.480
And then multiply by 100
to get your percentage.

00:08:00.480 --> 00:08:02.710
Now, these 100s,
obviously, cancel out.

00:08:02.710 --> 00:08:04.610
These 100s cancel out.

00:08:04.610 --> 00:08:07.094
And so we are going to be
left with-- when you divide

00:08:07.094 --> 00:08:08.510
by a fraction,
it's the same thing

00:08:08.510 --> 00:08:10.720
as multiplying by its inverse.

00:08:10.720 --> 00:08:17.320
So we're going to get 2/3
times negative 8.5 over 1--

00:08:17.320 --> 00:08:22.830
or times negative 8.5.

00:08:22.830 --> 00:08:24.930
I'll get out our
calculator and it

00:08:24.930 --> 00:08:32.559
is-- well, multiply
2 times negative 8.5,

00:08:32.559 --> 00:08:38.610
and then divided by 3, which
gives us negative 5.6667.

00:08:38.610 --> 00:08:40.779
It's really negative 5 2/3.

00:08:40.779 --> 00:08:42.320
So I'll just write
it negative-- I'll

00:08:42.320 --> 00:08:44.950
round it-- it's negative 5.67.

00:08:44.950 --> 00:08:51.260
So this is approximately
equal to negative 5.67.

00:08:51.260 --> 00:08:55.570
So right over here
it's negative 5.67.

00:08:55.570 --> 00:09:00.190
And this absolute value
is, obviously, just 5.67.

00:09:00.190 --> 00:09:03.710
And I'll leave it to you
to verify, for yourself,

00:09:03.710 --> 00:09:06.470
that you'll get the same
elasticity of demand

00:09:06.470 --> 00:09:08.040
using this technique--
where you use

00:09:08.040 --> 00:09:10.470
the average as your
base in the percentage.

00:09:10.470 --> 00:09:13.970
Going from 9 to 8 as
going-- going from 9 to 8

00:09:13.970 --> 00:09:16.580
in price as going
from 8 to 9 in price.

00:09:16.580 --> 00:09:20.330
Which is different than if you
used the 9 as the base or the 8

00:09:20.330 --> 00:09:21.330
as the base.

00:09:21.330 --> 00:09:22.990
So this right here
is the elasticity

00:09:22.990 --> 00:09:25.470
of demand-- not just at point
A. You can, kind of, view

00:09:25.470 --> 00:09:27.410
it is the average
elasticity of demand

00:09:27.410 --> 00:09:29.680
over this little part of
the curve, which is really

00:09:29.680 --> 00:09:33.400
a line in this example--
over this part of the arc.

00:09:33.400 --> 00:09:36.680
So we'll write that
part right over here.

00:09:36.680 --> 00:09:38.090
I'll write the absolute value.

00:09:38.090 --> 00:09:42.040
The absolute value of our
elasticity of demand is 5.67.

00:09:42.040 --> 00:09:45.200
Now let's do the other two
sections right over here.

00:09:45.200 --> 00:09:47.920
So let's think
about what happens

00:09:47.920 --> 00:09:55.230
when we go from C to D. So our
elasticity of demand there.

00:09:55.230 --> 00:09:59.420
So from C to D we have a
change in quantity, once again,

00:09:59.420 --> 00:10:00.410
of plus 2.

00:10:00.410 --> 00:10:03.990
And our change in price,
once again, is negative 1.

00:10:03.990 --> 00:10:07.291
But we'll see, even though
that the change in the quantity

00:10:07.291 --> 00:10:09.040
over-- the change of
quantity is the same,

00:10:09.040 --> 00:10:10.540
and the change in
price is the same,

00:10:10.540 --> 00:10:12.830
we're going to have a
different elasticity of demand,

00:10:12.830 --> 00:10:15.650
because we have different
starting points.

00:10:15.650 --> 00:10:17.920
Our starting points and
our ending points for price

00:10:17.920 --> 00:10:20.560
are lower and our starting
and ending points for quantity

00:10:20.560 --> 00:10:21.110
are higher.

00:10:21.110 --> 00:10:23.650
So it will actually
change the percentage.

00:10:23.650 --> 00:10:25.180
So let's see what we get.

00:10:25.180 --> 00:10:27.920
So our percent change
in quantity-- we

00:10:27.920 --> 00:10:30.470
have a change in quantity of 2.

00:10:30.470 --> 00:10:33.070
And then our average
quantity is 9

00:10:33.070 --> 00:10:38.690
plus 11, which is 20,
divided by 2 is 10.

00:10:38.690 --> 00:10:41.980
All of that over
percent change in price.

00:10:41.980 --> 00:10:51.410
So we have-- let me scroll down
a little bit-- negative one

00:10:51.410 --> 00:10:53.660
divided by the average price.

00:10:53.660 --> 00:10:55.550
So negative 1 is
the change in price.

00:10:55.550 --> 00:10:58.170
And we want to divide
that by the average price.

00:10:58.170 --> 00:11:02.370
Well, $5.50 plus $4.50 is
$10-- divided by 2 is $5.00.

00:11:02.370 --> 00:11:04.980
So the average is $5.00.

00:11:04.980 --> 00:11:06.550
And we can multiply
the numerator

00:11:06.550 --> 00:11:08.340
by 100 and the
denominator by 100,

00:11:08.340 --> 00:11:11.060
but that won't change
anything, because we could just

00:11:11.060 --> 00:11:12.750
divide both by 100.

00:11:12.750 --> 00:11:15.340
And so this is
equal to 2 over 10,

00:11:15.340 --> 00:11:17.870
times-- dividing by a
fraction is the same thing

00:11:17.870 --> 00:11:22.070
as multiplying by its inverse--
times negative 5 over 1.

00:11:22.070 --> 00:11:25.320
And this is just because 2 over
10 is the same thing as 1/5.

00:11:25.320 --> 00:11:29.340
1/5 times negative 5 over
1-- it is negative 1.

00:11:29.340 --> 00:11:30.700
So this right over here.

00:11:30.700 --> 00:11:33.116
So our elasticity of demand
right over here is negative 1.

00:11:33.116 --> 00:11:34.990
Or it's absolute value is 1.

00:11:34.990 --> 00:11:38.470
So the absolute value of
the elasticity of demand,

00:11:38.470 --> 00:11:41.602
right over here, is equal to 1.

00:11:41.602 --> 00:11:43.060
Now let's just do
one more section,

00:11:43.060 --> 00:11:45.185
and maybe, the next video
we can think a little bit

00:11:45.185 --> 00:11:47.090
about what it's telling us.

00:11:47.090 --> 00:11:49.220
So let's do this last
section over here,

00:11:49.220 --> 00:11:51.100
just for some practice.

00:11:51.100 --> 00:11:53.224
I encourage you to pause
it and try it yourself.

00:11:53.224 --> 00:11:55.140
And so we're going to
think about this section

00:11:55.140 --> 00:11:55.990
right over here.

00:11:55.990 --> 00:11:59.470
So once again, our change
in quantity is plus 2,

00:11:59.470 --> 00:12:02.440
and our change in
price is negative 1.

00:12:02.440 --> 00:12:05.200
And our elasticity
of demand-- change

00:12:05.200 --> 00:12:10.030
in quantity-- 2 over average
quantity, which is 17.

00:12:10.030 --> 00:12:14.180
Change in price is negative
1 over average price--

00:12:14.180 --> 00:12:16.760
1 plus 2 divided by 2 is $1.50.

00:12:16.760 --> 00:12:21.100
Or $1.50 is right in between
these two-- divided by $1.50.

00:12:21.100 --> 00:12:23.930
We don't have to multiply the
numerator and the denominator

00:12:23.930 --> 00:12:25.780
by 100 because those
just cancel out.

00:12:25.780 --> 00:12:30.110
So we get 2 over 17,
times negative-- well,

00:12:30.110 --> 00:12:33.990
we could just write this
as negative $1.50 over 1.

00:12:33.990 --> 00:12:36.630
And this is equal
to-- getting our--

00:12:36.630 --> 00:12:38.940
getting our calculator back out.

00:12:38.940 --> 00:12:41.890
So this is equal to--
I'll just write-- well,

00:12:41.890 --> 00:12:44.470
it's really just going to be
negative 3 over 17, right?

00:12:44.470 --> 00:12:48.560
2 times negative $1.50
is negative 3 over 17.

00:12:48.560 --> 00:12:55.480
So negative 3 divided by 17
is equal to, I'll just say,

00:12:55.480 --> 00:12:57.580
negative 0.18.

00:12:57.580 --> 00:13:05.860
So here it is, negative 0.18,
and its absolute value is 0.18.

00:13:05.860 --> 00:13:11.440
So the elasticity of
demand over here is 0.18.

00:13:11.440 --> 00:13:13.710
And I'll leave you there,
and in the next video

00:13:13.710 --> 00:13:17.170
we'll think about these
results a little bit.


Changes in Market Equilibrium

WEBVTT
Kind: captions
Language: en

00:00:00.244 --> 00:00:01.660
What I want to do
in this video is

00:00:01.660 --> 00:00:06.070
think about how supply and/or
demand might change based

00:00:06.070 --> 00:00:08.840
on changes in some
factors in the market.

00:00:08.840 --> 00:00:11.910
And then think about what that
might do to the equilibrium

00:00:11.910 --> 00:00:15.040
price and equilibrium quantity.

00:00:15.040 --> 00:00:17.220
So let's say at
some period, this

00:00:17.220 --> 00:00:19.270
is what the supply
curve looks like

00:00:19.270 --> 00:00:21.406
and this is what the
demand curve looks like.

00:00:21.406 --> 00:00:23.280
And then all of a sudden,
this thing happens.

00:00:23.280 --> 00:00:26.410
A new disease-resistant
apple is invented.

00:00:26.410 --> 00:00:29.500
What's likely to happen
for the next period?

00:00:29.500 --> 00:00:32.490
Well, a new disease-resistant
apple being invented,

00:00:32.490 --> 00:00:34.990
this is something that
clearly impacts the growers,

00:00:34.990 --> 00:00:36.580
clearly impacts the suppliers.

00:00:36.580 --> 00:00:38.860
All of a sudden, they'll
have fewer apples

00:00:38.860 --> 00:00:40.590
succumbing to disease.

00:00:40.590 --> 00:00:42.980
And so they will be able
to produce more apples.

00:00:42.980 --> 00:00:46.590
So at any given
price point, this

00:00:46.590 --> 00:00:49.650
will shift the
quantity supplied up.

00:00:49.650 --> 00:00:51.900
So at any given
price point, it will

00:00:51.900 --> 00:00:56.030
shift the quantity of
apples supplied up.

00:00:56.030 --> 00:00:57.880
Or you could say that
the entire supply

00:00:57.880 --> 00:01:04.180
curve is shifted to the
right, or supply goes up.

00:01:04.180 --> 00:01:05.650
And let me draw
the entire curve.

00:01:05.650 --> 00:01:08.250
And obviously, if now we have
disease-resistant apples,

00:01:08.250 --> 00:01:12.160
even our minimum price to start
producing apples is lower.

00:01:12.160 --> 00:01:15.070
Now, when we had the supply
curve shift in this way,

00:01:15.070 --> 00:01:16.770
when it shifted
to the right, what

00:01:16.770 --> 00:01:19.070
happens to the
equilibrium price?

00:01:19.070 --> 00:01:22.350
Well our old equilibrium
price was right over here.

00:01:22.350 --> 00:01:25.120
Our new equilibrium price--
so this is the old one.

00:01:25.120 --> 00:01:27.320
And this is our new
equilibrium price.

00:01:27.320 --> 00:01:30.210
We're assuming that demand
has not changed at all.

00:01:30.210 --> 00:01:32.540
So this is our new
equilibrium price.

00:01:32.540 --> 00:01:34.800
So our new equilibrium
price is lower.

00:01:34.800 --> 00:01:37.937
So the price went down.

00:01:37.937 --> 00:01:40.270
And you don't have to-- you
could have probably reasoned

00:01:40.270 --> 00:01:42.400
through that before,
taking an econ class.

00:01:42.400 --> 00:01:44.816
But this way, at least you
have some way to think about it

00:01:44.816 --> 00:01:46.930
and think about how the
curves are changing.

00:01:46.930 --> 00:01:49.700
Now, let's think
about this scenario.

00:01:49.700 --> 00:01:50.730
So this is before.

00:01:50.730 --> 00:01:53.130
So in all of these
examples, the graph

00:01:53.130 --> 00:01:55.230
is what happened before
the news came out,

00:01:55.230 --> 00:01:56.780
or the event came out.

00:01:56.780 --> 00:01:58.090
So this is before.

00:01:58.090 --> 00:02:01.100
And then a study is released
on how apples prevent cancer.

00:02:01.100 --> 00:02:02.410
So what is that likely to do?

00:02:02.410 --> 00:02:04.490
Well, no one wants cancer.

00:02:04.490 --> 00:02:07.480
And so more people are going
to be eager to have apples.

00:02:07.480 --> 00:02:09.280
This will change
customer preferences.

00:02:09.280 --> 00:02:11.200
They will prefer
apples even more

00:02:11.200 --> 00:02:13.610
when they're at the supermarket.

00:02:13.610 --> 00:02:16.960
So this is clearly affecting
demand customer preferences.

00:02:16.960 --> 00:02:20.860
And so at a given
price, people will

00:02:20.860 --> 00:02:23.810
want-- they will demand a
higher quantity of apples.

00:02:23.810 --> 00:02:27.610
The quantity of apples demanded
at a given price will go up.

00:02:27.610 --> 00:02:31.330
So the demand curve
will shift to the right.

00:02:31.330 --> 00:02:34.060
Or you could say, the
demand would go up.

00:02:34.060 --> 00:02:36.310
So that's the new demand curve.

00:02:36.310 --> 00:02:38.050
So here, demand goes up.

00:02:40.811 --> 00:02:42.060
And let me write it over here.

00:02:42.060 --> 00:02:44.170
In this situation,
supply went up.

00:02:44.170 --> 00:02:45.450
Here, demand goes up.

00:02:45.450 --> 00:02:47.800
And what happens to the price?

00:02:47.800 --> 00:02:50.830
Well, this is our old
equilibrium price.

00:02:50.830 --> 00:02:53.280
This is our new
equilibrium price.

00:02:53.280 --> 00:02:55.530
The price clearly went up.

00:02:55.530 --> 00:02:57.404
So the price went up.

00:02:57.404 --> 00:02:59.820
And actually over here, let's
think about the quantity too

00:02:59.820 --> 00:03:01.330
in this first situation.

00:03:01.330 --> 00:03:03.200
This is our old
equilibrium quantity.

00:03:03.200 --> 00:03:05.400
This is our new
equilibrium quantity.

00:03:05.400 --> 00:03:09.336
Quantity went up,
which makes sense.

00:03:09.336 --> 00:03:11.210
You have fewer apples
dying, price went down,

00:03:11.210 --> 00:03:12.470
more people want to buy them.

00:03:12.470 --> 00:03:16.280
Here, price went up, and
what happened to quantity?

00:03:18.830 --> 00:03:21.300
Quantity-- this was our
old equilibrium quantity.

00:03:21.300 --> 00:03:23.310
This is our new
equilibrium quantity.

00:03:23.310 --> 00:03:27.210
Quantity also went up.

00:03:27.210 --> 00:03:28.710
More people just
want to buy apples.

00:03:28.710 --> 00:03:30.590
They don't want to get cancer.

00:03:30.590 --> 00:03:33.050
Now let's think about these
scenarios right over here.

00:03:33.050 --> 00:03:37.560
The pear cider industry
launches an ad campaign.

00:03:37.560 --> 00:03:39.260
And for the sake of
this, let's assume

00:03:39.260 --> 00:03:42.730
that the same growers who grow
apples can also grow pears.

00:03:42.730 --> 00:03:44.500
That makes it interesting.

00:03:44.500 --> 00:03:46.590
So you have a couple
of interesting things.

00:03:46.590 --> 00:03:48.550
By launching this
advertising campaign--

00:03:48.550 --> 00:03:50.425
we're going to assume
it's a good advertising

00:03:50.425 --> 00:03:55.700
campaign-- this clearly will
make demand go up for-- sorry,

00:03:55.700 --> 00:03:59.720
it'll make demand go up
for cider, for pear cider,

00:03:59.720 --> 00:04:00.767
relative to apple cider.

00:04:00.767 --> 00:04:02.350
Most people, when
they think of cider,

00:04:02.350 --> 00:04:03.740
they think of apple cider.

00:04:03.740 --> 00:04:05.740
Now all of a sudden,
pear cider comes out.

00:04:05.740 --> 00:04:08.640
It'll make demand for
apple cider go down.

00:04:08.640 --> 00:04:17.000
So this is apple cider
demand will go down.

00:04:17.000 --> 00:04:19.339
Now, if apple cider
demand goes down,

00:04:19.339 --> 00:04:23.800
the apple cider producers are
going to demand fewer apples.

00:04:23.800 --> 00:04:31.120
So this is going to mean that
apple demand will go down.

00:04:31.120 --> 00:04:34.450
At any given price point,
apple demand will go down.

00:04:34.450 --> 00:04:38.092
So apple demand, the demand
curve, will shift to the left.

00:04:38.092 --> 00:04:39.800
Or I should say at
any given price point,

00:04:39.800 --> 00:04:42.110
the quantity demanded
will go down.

00:04:42.110 --> 00:04:44.630
And so the entire demand
curve, the entire relationship,

00:04:44.630 --> 00:04:45.690
will shift to the left.

00:04:48.260 --> 00:04:50.360
Now, that's not all
that might happen.

00:04:50.360 --> 00:04:52.360
Because if you think about
it from the suppliers

00:04:52.360 --> 00:04:54.818
point of view, and I don't know
if this really is the case,

00:04:54.818 --> 00:04:57.220
but let's assume that the
farmers who grow apples

00:04:57.220 --> 00:04:59.340
can also grow pears.

00:04:59.340 --> 00:05:01.970
Well, they might say,
well, now that there's

00:05:01.970 --> 00:05:04.580
more demand for pears,
they're doing this advertising

00:05:04.580 --> 00:05:08.230
campaign, I want to-- and
probably the price of pears

00:05:08.230 --> 00:05:10.140
has gone up-- they
might say, well,

00:05:10.140 --> 00:05:12.910
I'm going to devote more of
my land to pears and less

00:05:12.910 --> 00:05:14.730
of my land to apples.

00:05:14.730 --> 00:05:21.710
And so the supply of apples-- so
apple supply-- want to be clear

00:05:21.710 --> 00:05:24.020
here that we're talking about
apple-- the apple supply

00:05:24.020 --> 00:05:25.540
might go down.

00:05:25.540 --> 00:05:27.400
So it'll also shift to the left.

00:05:27.400 --> 00:05:29.790
So they're both
shifting to the left.

00:05:32.530 --> 00:05:34.650
Now what is likely
to happen here?

00:05:34.650 --> 00:05:36.830
So the demand went down
and the supply went down.

00:05:36.830 --> 00:05:38.800
They both shifted to the left.

00:05:38.800 --> 00:05:43.360
Well, here the way I drew it,
this was our old equilibrium

00:05:43.360 --> 00:05:45.275
price, this is our
new equilibrium price.

00:05:45.275 --> 00:05:47.650
It actually looks the way that
I drew it right over here,

00:05:47.650 --> 00:05:49.330
that it did not change.

00:05:49.330 --> 00:05:51.880
The equilibrium quantity
definitely did change.

00:05:51.880 --> 00:05:54.070
So let's see, this is our
old equilibrium quantity.

00:05:54.070 --> 00:05:55.920
This is our new
equilibrium quantity.

00:05:55.920 --> 00:05:58.420
This clearly, the
quantity, went down.

00:05:58.420 --> 00:06:00.050
It was a bad day for apples.

00:06:00.050 --> 00:06:02.180
But the price didn't
change, because, at least

00:06:02.180 --> 00:06:04.710
in the example, we assume
that the farmers actually also

00:06:04.710 --> 00:06:06.770
produced fewer apples.

00:06:06.770 --> 00:06:09.310
It turns out, I could have
drawn this in multiple ways.

00:06:09.310 --> 00:06:12.540
And actually, let me draw
it in different ways here.

00:06:12.540 --> 00:06:15.100
So the quantity
definitely-- so let's

00:06:15.100 --> 00:06:16.440
think about other scenarios.

00:06:16.440 --> 00:06:18.110
Let me draw it
slightly different.

00:06:18.110 --> 00:06:21.760
Let's say that the supply goes
down even more dramatically.

00:06:21.760 --> 00:06:26.230
So let's say the supply shifts
all the way-- the supply shifts

00:06:26.230 --> 00:06:27.470
really far back.

00:06:27.470 --> 00:06:29.210
Now, what happened?

00:06:29.210 --> 00:06:31.480
Well now, our
equilibrium price--

00:06:31.480 --> 00:06:37.300
because the reduction in
supply was kind of more extreme

00:06:37.300 --> 00:06:40.140
than the reduction in demand.

00:06:40.140 --> 00:06:42.870
And it really depends on how the
curve shapes and all of that.

00:06:42.870 --> 00:06:44.453
The main thing is
to reason through it

00:06:44.453 --> 00:06:46.490
or to actually see what
the actual results are.

00:06:46.490 --> 00:06:50.230
But in this situation, all of a
sudden that the price went up,

00:06:50.230 --> 00:06:52.949
but the quantity
definitely still went down.

00:06:52.949 --> 00:06:54.990
So in this case, the one
thing that you're always

00:06:54.990 --> 00:06:56.656
going to be sure of
is that the quantity

00:06:56.656 --> 00:06:58.230
will go down but
the price went up.

00:06:58.230 --> 00:07:03.230
Because this effect-- the
supply went down much more

00:07:03.230 --> 00:07:04.350
than the demand did.

00:07:04.350 --> 00:07:06.190
And so the price went up.

00:07:06.190 --> 00:07:07.940
Now I could have done
another scenario.

00:07:07.940 --> 00:07:10.960
I could have done another
scenario where maybe the supply

00:07:10.960 --> 00:07:13.410
barely budged or maybe the
demand went down dramatically.

00:07:13.410 --> 00:07:15.980
Let me draw it where the
supply barely budges.

00:07:15.980 --> 00:07:19.010
So maybe the supply, it only
gets shifted a little bit

00:07:19.010 --> 00:07:20.160
to the left.

00:07:20.160 --> 00:07:22.706
So maybe the supply
curve looks like this.

00:07:22.706 --> 00:07:25.330
Now all of a sudden, once again,
quantity definitely goes down.

00:07:25.330 --> 00:07:29.137
So in all of the scenarios,
the quantity will go down.

00:07:29.137 --> 00:07:31.470
But I've just done three
scenarios where the price could

00:07:31.470 --> 00:07:34.600
be neutral, the price could go
up, or the price could go down.

00:07:34.600 --> 00:07:36.730
So you actually
don't know what is

00:07:36.730 --> 00:07:38.780
going to happen to the
price based on this.

00:07:38.780 --> 00:07:40.905
You would actually have to
look at the actual curve

00:07:40.905 --> 00:07:43.385
and see what the new
equilibrium prices are.

00:07:43.385 --> 00:07:44.510
Now let's look at this one.

00:07:44.510 --> 00:07:50.260
The apple pickers unionize and
they demand wage increases.

00:07:50.260 --> 00:07:52.620
So this is an issue
for the suppliers.

00:07:52.620 --> 00:07:54.610
So all of a sudden,
one of their inputs,

00:07:54.610 --> 00:07:57.820
one of their costs of
production, which is labor,

00:07:57.820 --> 00:07:59.110
has gone up.

00:07:59.110 --> 00:08:01.470
So if their cost of
production has gone up,

00:08:01.470 --> 00:08:04.110
now at a given price point,
they are less profitable,

00:08:04.110 --> 00:08:06.760
less willing to produce apples.

00:08:06.760 --> 00:08:08.650
So at a given price
point-- so we're

00:08:08.650 --> 00:08:11.530
talking about the suppliers--
at a given price point,

00:08:11.530 --> 00:08:15.920
they will supply
a lower quantity.

00:08:15.920 --> 00:08:18.140
So this is going
to lower supply.

00:08:21.480 --> 00:08:26.690
And when you lower supply,
what's going to happen?

00:08:26.690 --> 00:08:30.470
Well, your
equilibrium quantity--

00:08:30.470 --> 00:08:32.929
this was our old one, this
was our new one-- equilibrium

00:08:32.929 --> 00:08:36.279
quantity definitely goes
down, the quantity went down.

00:08:36.279 --> 00:08:37.570
And what happened to the price?

00:08:37.570 --> 00:08:39.809
We're assuming nothing
changes to the demand.

00:08:39.809 --> 00:08:42.440
So this was our old
equilibrium price.

00:08:42.440 --> 00:08:44.600
This is our new
equilibrium price.

00:08:44.600 --> 00:08:45.600
It went up.

00:08:45.600 --> 00:08:49.090
Quantity went down,
and price went up.

00:08:49.090 --> 00:08:51.500
And I encourage
you to-- well one,

00:08:51.500 --> 00:08:52.580
I should have told you
this at the beginning, too.

00:08:52.580 --> 00:08:54.310
You should have tried to do
these yourself and then see

00:08:54.310 --> 00:08:55.820
what I had to say
about them-- but I

00:08:55.820 --> 00:08:58.210
encourage you to try this out
with different situations.

00:08:58.210 --> 00:09:00.200
Think of situations
yourself and even

00:09:00.200 --> 00:09:04.160
think about different markets
other than the apple market.