Microeconomics · Lecture 6: price elasticity

Sammanfattning

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Översikt

Alla deltagare

• Prof. AdlerLecturer91 % av tiden
• MiaStudent5 % av tiden
• Talare 3Student4 % av tiden

Questions

• Is a value of minus two elastic? Yes: its absolute value is above one. 01:28›01:39›
• Why do fuel prices rise without people driving less? Short-run demand is inelastic. 03:04›03:15›
• Is the midpoint method in the exam? Yes, both methods are. 06:18›06:26›

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Huvudpunkter

1. Elasticity = % change in quantity demanded ÷ % change in price. 00:29›
2. In absolute value, above 1 demand is elastic; below 1 it's inelastic. 01:07›
3. Substitutes, share of the budget and time decide how elastic demand is. 01:49›02:02›02:21›02:42›
4. With inelastic demand a higher price raises revenue; with elastic demand it lowers it. 03:42›04:02›
5. Cinema example: 8 € × 400 tickets = 3,200 €; 10 € × 300 tickets = 3,000 €. 04:21›05:14›

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Uppgifter

3 uppgifter

• Problem set 3 (both elasticity methods)

  Monday the 27th06:26›

• Read chapter 5, sections 1–3

  Thursday06:43›

• Bring a calculator

  Thursday06:43›

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Kapitel

5 kapitel

1. 00:00Definition of elasticity01:49
2. 01:49What makes demand elastic01:39
3. 03:28Elasticity and revenue00:53
4. 04:21Worked example: cinema tickets01:57
5. 06:18Exam, homework and recap01:12

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Transkription

1. 00:00

   Prof. AdlerLecturer

   Good afternoon. Last week we drew demand curves; today we ask how much demand reacts when the price changes.

2. 00:18

   That reaction has a name: the price elasticity of demand.

3. 00:29

   The definition: the percentage change in quantity demanded divided by the percentage change in price.

4. 00:48

   If the price rises ten percent and people buy twenty percent less, the elasticity is minus two.

5. 01:07

   We usually talk about its absolute value. Above one, demand is elastic; below one, it's inelastic.

6. 01:28

   MiaStudent

   So with minus two demand is elastic, because two is bigger than one?

7. 01:39

   Prof. AdlerLecturer

   Exactly. Buyers react strongly to the price.

8. 01:49

   Now, what makes a good elastic or inelastic? Mainly three things.

9. 02:02

   First, substitutes. If there are many alternatives, like brands of bottled water, demand is elastic.

10. 02:21

    Second, the share of your budget. Salt is cheap, so a higher price barely changes how much you buy.

11. 02:42

    Third, time. In the short run you can't easily replace the fuel for your car; over years, you might change car or move.

12. 03:04

    Talare 3Student

    Is that why fuel prices can rise a lot without people driving much less?

13. 03:15

    Prof. AdlerLecturer

    Yes. In the short run, demand for fuel is quite inelastic.

14. 03:28

    Here's why this matters for a business: elasticity tells you what happens to revenue.

15. 03:42

    If demand is inelastic, raising the price increases total revenue, because quantity falls only a little.

16. 04:02

    If demand is elastic, a higher price lowers revenue: you lose more in sales than you gain per unit.

17. 04:21

    Let's do one together. A cinema charges eight euros and sells four hundred tickets a night.

18. 04:38

    It raises the price to ten euros, that's twenty-five percent, and sells three hundred tickets, twenty-five percent fewer.

19. 05:01

    MiaStudent

    Then the elasticity is minus one and revenue stays the same?

20. 05:14

    Prof. AdlerLecturer

    Check the arithmetic: four hundred times eight is three thousand two hundred; three hundred times ten is three thousand. Revenue falls a little.

21. 05:38

    Measured this way the elasticity is exactly one in absolute value, what we call unit elastic.

22. 05:55

    The difference comes from measuring percentages from the starting point; next week the midpoint method fixes that.

23. 06:18

    Talare 3Student

    Will the midpoint method be in the exam?

24. 06:26

    Prof. AdlerLecturer

    Yes, both methods are. Problem set three covers them; it's due on Monday the twenty-seventh.

25. 06:43

    For Thursday, read chapter five, sections one to three, and bring a calculator.

26. 06:59

    To finish: elasticity is a ratio of percentages, its size depends on substitutes, budget share and time, and it tells you what happens to revenue.

27. 07:22

    See you on Thursday.