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Dialogue: 0,0:00:09.40,0:00:13.25,Default,,0000,0000,0000,,- In our first lecture on the elasticity\Nof demand, we explain the intuitive
Dialogue: 0,0:00:13.43,0:00:18.22,Default,,0000,0000,0000,,meaning of elasticity. It measures the\Nresponsiveness of the quantity demanded to
Dialogue: 0,0:00:18.40,0:00:22.01,Default,,0000,0000,0000,,a change in price. More responsive\Nmeans more elastic.
Dialogue: 0,0:00:22.62,0:00:26.91,Default,,0000,0000,0000,,In this lecture, we're going to show how\Nto create a numeric measure of elasticity.
Dialogue: 0,0:00:27.09,0:00:32.82,Default,,0000,0000,0000,,How to calculate with some data on prices\Nand quantities, what the elasticity is
Dialogue: 0,0:00:33.00,0:00:34.82,Default,,0000,0000,0000,,over a range of the demand curve.
Dialogue: 0,0:00:39.72,0:00:42.45,Default,,0000,0000,0000,,So here's a more precise definition\Nof elasticity.
Dialogue: 0,0:00:42.45,0:00:47.92,Default,,0000,0000,0000,,The elasticity of demand is\Nthe percentage change in quantity demanded
Dialogue: 0,0:00:48.10,0:00:51.35,Default,,0000,0000,0000,,divided by the percentage change in price.
Dialogue: 0,0:00:51.94,0:00:56.92,Default,,0000,0000,0000,,So let's write it like this. We have some\Nnotation here. The elasticity demand is
Dialogue: 0,0:00:57.10,0:01:03.89,Default,,0000,0000,0000,,equal to the percentage change in. Delta\Nis the symbol for change in, so this is
Dialogue: 0,0:01:04.07,0:01:10.04,Default,,0000,0000,0000,,the percentage change in the quantity\Ndemanded divided by the percentage change
Dialogue: 0,0:01:10.22,0:01:16.72,Default,,0000,0000,0000,,in the price. That's the elasticity of\Ndemand. Let's give an example or two.
Dialogue: 0,0:01:16.90,0:01:22.67,Default,,0000,0000,0000,,So if the price of oil increases by 10%\Nand over a period of several years the
Dialogue: 0,0:01:22.85,0:01:27.60,Default,,0000,0000,0000,,quantity demanded falls by 5%,\Nthen the long run
Dialogue: 0,0:01:27.60,0:01:31.22,Default,,0000,0000,0000,,elasticity of demand for oil is what?
Dialogue: 0,0:01:32.71,0:01:39.44,Default,,0000,0000,0000,,Well, elasticity is the percentage change\Nand the quantity demanded. That's minus 5%
Dialogue: 0,0:01:39.62,0:01:44.81,Default,,0000,0000,0000,,divided by the percentage change in the\Nprice. That's 10%. So the elasticity of
Dialogue: 0,0:01:44.99,0:01:51.25,Default,,0000,0000,0000,,demand is minus 5% divided by 10%, or\Nnegative 0.5.
Dialogue: 0,0:01:52.82,0:01:58.02,Default,,0000,0000,0000,,Elasticities of demand are always negative\Nbecause when price goes up, the quantity
Dialogue: 0,0:01:58.02,0:02:02.27,Default,,0000,0000,0000,,demanded goes down. When price goes down,\Nthe quantity demanded goes up.
Dialogue: 0,0:02:02.85,0:02:06.68,Default,,0000,0000,0000,,So we often drop the negative sign and\Nwrite that the elasticity
Dialogue: 0,0:02:06.68,0:02:09.64,Default,,0000,0000,0000,,of demand is 0.5.
Dialogue: 0,0:02:11.35,0:02:17.87,Default,,0000,0000,0000,,Here's some more important notation. If\Nthe absolute value of the elasticity of
Dialogue: 0,0:02:18.05,0:02:23.30,Default,,0000,0000,0000,,demand is less than one, just like the\Nexample we just gave for oil, we say that
Dialogue: 0,0:02:23.48,0:02:28.58,Default,,0000,0000,0000,,the demand curve is inelastic. Elasticity\Nof demand less than one,
Dialogue: 0,0:02:28.58,0:02:30.66,Default,,0000,0000,0000,,the demand curve is inelastic.
Dialogue: 0,0:02:31.70,0:02:36.57,Default,,0000,0000,0000,,If the elasticity demand is greater than\None, we say the demand curve is elastic.
Dialogue: 0,0:02:36.75,0:02:41.80,Default,,0000,0000,0000,,And if elasticity of demand is equal to\None, that is the knife point case, then
Dialogue: 0,0:02:41.98,0:02:44.80,Default,,0000,0000,0000,,the demand curve is unit elastic.
Dialogue: 0,0:02:45.57,0:02:49.46,Default,,0000,0000,0000,,These terms are going to come back, so\Njust keep them in mind.
Dialogue: 0,0:02:49.64,0:02:53.48,Default,,0000,0000,0000,,Inelastic: less than one.\NElastic: greater than one.
Dialogue: 0,0:02:53.48,0:02:58.69,Default,,0000,0000,0000,,So we know that elasticity is the\Npercentage change in quantity divided by
Dialogue: 0,0:02:58.69,0:03:00.36,Default,,0000,0000,0000,,the percentage change in price,
Dialogue: 0,0:03:00.36,0:03:02.91,Default,,0000,0000,0000,,how do we calculate the\Npercentage change in something?
Dialogue: 0,0:03:03.64,0:03:06.47,Default,,0000,0000,0000,,This is not so hard, but it could be a\Nlittle bit tricky for the following
Dialogue: 0,0:03:06.65,0:03:10.72,Default,,0000,0000,0000,,reason. Let's suppose you're driving down\Nthe highway at 100 miles per hour. I don't
Dialogue: 0,0:03:10.90,0:03:14.27,Default,,0000,0000,0000,,recommend this, but let's just imagine\Nthat you are. You're going 100 miles per
Dialogue: 0,0:03:14.45,0:03:21.09,Default,,0000,0000,0000,,hour, and now you increase speed by 50%.\NHow fast are you going? 150 miles per
Dialogue: 0,0:03:21.09,0:03:26.17,Default,,0000,0000,0000,,hour, right? Okay, so now you're going 150\Nmiles per hour. Suppose you decrease speed
Dialogue: 0,0:03:26.17,0:03:32.54,Default,,0000,0000,0000,,by 50%. Now, how fast are you going? 75\Nmiles per hour, right? So how is it that
Dialogue: 0,0:03:32.54,0:03:36.64,Default,,0000,0000,0000,,you can increase speed by 50% and then\Ndecrease by 50%
Dialogue: 0,0:03:36.64,0:03:38.92,Default,,0000,0000,0000,,and not be back to where you started?
Dialogue: 0,0:03:39.89,0:03:44.45,Default,,0000,0000,0000,,Well the answer is, is that intuitively we\Nhave changed the base by which we are
Dialogue: 0,0:03:44.63,0:03:51.16,Default,,0000,0000,0000,,calculating the percentage change. And we\Ndon't want to have this inconsistency when
Dialogue: 0,0:03:51.34,0:03:56.43,Default,,0000,0000,0000,,we calculate elasticity. We want people to\Nget the same elasticity whether they're
Dialogue: 0,0:03:56.61,0:03:59.69,Default,,0000,0000,0000,,calculating from the lower base\Nor from the higher base.
Dialogue: 0,0:03:59.87,0:04:04.61,Default,,0000,0000,0000,,So because of that, we're going to use the\NMidpoint Formula. So the elasticity of
Dialogue: 0,0:04:04.79,0:04:09.26,Default,,0000,0000,0000,,demand, percentage change in quantity\Ndivided by the percentage change in price,
Dialogue: 0,0:04:09.44,0:04:16.07,Default,,0000,0000,0000,,that's the change in quantity divided by\Nthe average quantity times 100. That will
Dialogue: 0,0:04:16.25,0:04:22.32,Default,,0000,0000,0000,,give us the percentage change divided by\Nthe change in price divided by the average
Dialogue: 0,0:04:22.50,0:04:26.28,Default,,0000,0000,0000,,price. Again, that times 100. Notice,\Nsince we've actually got 100 on top and
Dialogue: 0,0:04:26.46,0:04:30.09,Default,,0000,0000,0000,,100 on the bottom, those 100s we can\Nactually cancel out.
Dialogue: 0,0:04:30.98,0:04:35.81,Default,,0000,0000,0000,,Let's expand this just a little bit more.\NThe change in quantity. What is the change
Dialogue: 0,0:04:35.99,0:04:40.19,Default,,0000,0000,0000,,in quantity? Well, let's suppose we have\Ntwo quantities. Let's call them after and
Dialogue: 0,0:04:40.37,0:04:44.33,Default,,0000,0000,0000,,before. It doesn't matter which one we\Ncall after or which one before. So we're
Dialogue: 0,0:04:44.51,0:04:50.93,Default,,0000,0000,0000,,going to then expand this to the change in\Nquantity. That's Q after minus Q before
Dialogue: 0,0:04:51.11,0:04:57.23,Default,,0000,0000,0000,,divided by the average, Q after plus Q\Nbefore, divided by two, divided by the
Dialogue: 0,0:04:57.41,0:05:03.15,Default,,0000,0000,0000,,change in price, P after minus P before,\Ndivided by the average price, P after plus
Dialogue: 0,0:05:03.33,0:05:05.12,Default,,0000,0000,0000,,P before, divide by two.
Dialogue: 0,0:05:05.64,0:05:11.12,Default,,0000,0000,0000,,So that's a little bit of a mouthful, but\Neverything, I think, is fairly simple.
Dialogue: 0,0:05:11.30,0:05:18.33,Default,,0000,0000,0000,,Just remember change in quantity divided\Nby the average quantity and you should
Dialogue: 0,0:05:18.51,0:05:23.04,Default,,0000,0000,0000,,always be able to calculate this. Let's\Ngive an example.
Dialogue: 0,0:05:23.22,0:05:27.42,Default,,0000,0000,0000,,Okay, here's an example of a type of\Nproblem you might see on a quiz or a mid
Dialogue: 0,0:05:27.60,0:05:33.16,Default,,0000,0000,0000,,term. At the initial price of $10, the\Nquantity demanded is 100. When the price
Dialogue: 0,0:05:33.34,0:05:40.55,Default,,0000,0000,0000,,rises to $20, the quantity demanded falls\Nto 90. What is the elasticity and, what is
Dialogue: 0,0:05:40.73,0:05:43.34,Default,,0000,0000,0000,,the elasticity over this range of the\Ndemand curve?
Dialogue: 0,0:05:44.04,0:05:47.71,Default,,0000,0000,0000,,Well, we always want to begin by writing\Ndown what we know, our formula. The
Dialogue: 0,0:05:47.89,0:05:50.88,Default,,0000,0000,0000,,elasticity of demand is the percentage\Nchange in quantity divided by the
Dialogue: 0,0:05:51.06,0:05:55.46,Default,,0000,0000,0000,,percentage change in price. Now, let's\Nremember to just expand that. That's Delta
Dialogue: 0,0:05:55.64,0:06:00.60,Default,,0000,0000,0000,,Q over the average Q all divided by Delta\NP over the average P.
Dialogue: 0,0:06:01.04,0:06:08.62,Default,,0000,0000,0000,,Now, we just start to fill things in. So\Nour quantity after, okay, after the change
Dialogue: 0,0:06:08.80,0:06:16.86,Default,,0000,0000,0000,,is 90. Our quantity before that was 100.\NSo on the top, the percentage change in
Dialogue: 0,0:06:17.04,0:06:21.64,Default,,0000,0000,0000,,quantity is 90 minus 100 divided by 90\Nplus 100, over two. That is the average
Dialogue: 0,0:06:21.82,0:06:28.26,Default,,0000,0000,0000,,quantity. And then on the bottom, and the\Nonly trick here is always write it in the
Dialogue: 0,0:06:28.44,0:06:33.68,Default,,0000,0000,0000,,same order, so if you put the 90 here,\Nthen make sure you put the 20, the number
Dialogue: 0,0:06:33.86,0:06:38.18,Default,,0000,0000,0000,,the price which is associated with that\Nquantity started off, the same way. So
Dialogue: 0,0:06:38.36,0:06:39.100,Default,,0000,0000,0000,,always just keep it in the same order.
Dialogue: 0,0:06:40.61,0:06:45.09,Default,,0000,0000,0000,,So on the bottom, then, we have the\Nquantity, the price after, which is 20
Dialogue: 0,0:06:45.27,0:06:49.43,Default,,0000,0000,0000,,minus the price before, which is 10,\Ndivided by the average price. And now,
Dialogue: 0,0:06:49.61,0:06:55.40,Default,,0000,0000,0000,,just, it's numerics. You plug in the\Nnumbers and what you get is the elasticity
Dialogue: 0,0:06:55.58,0:07:01.52,Default,,0000,0000,0000,,of demand is equal to negative 0.158,\Napproximately. We can always drop the
Dialogue: 0,0:07:01.70,0:07:04.51,Default,,0000,0000,0000,,negative sign because these things,\Nelasticity of demands, are always
Dialogue: 0,0:07:04.69,0:07:11.72,Default,,0000,0000,0000,,negative. So it's equal to 0.158. So does\Nthis make the elasticity of demand over
Dialogue: 0,0:07:11.90,0:07:19.94,Default,,0000,0000,0000,,this range elastic or inelastic?\NInelastic, right? The elasticity of demand
Dialogue: 0,0:07:20.12,0:07:24.45,Default,,0000,0000,0000,,we've just calculated as less than one, so\Nthat makes this one inelastic.
Dialogue: 0,0:07:24.45,0:07:26.12,Default,,0000,0000,0000,,There you go.
Dialogue: 0,0:07:27.03,0:07:31.07,Default,,0000,0000,0000,,We need to cover one more important point\Nabout the elasticity of demand, and that
Dialogue: 0,0:07:31.25,0:07:37.41,Default,,0000,0000,0000,,is its relationship to total revenue. So a\Nfirms revenues are very simply equal to
Dialogue: 0,0:07:37.59,0:07:42.86,Default,,0000,0000,0000,,price times quantity sold. Revenue is\Nequal to price times quantity.
Dialogue: 0,0:07:43.04,0:07:47.27,Default,,0000,0000,0000,,Now, elasticity, it's all about the\Nrelationship between price and quantity,
Dialogue: 0,0:07:47.45,0:07:52.80,Default,,0000,0000,0000,,and so it's also going to have\Nimplications for revenue. Let's give some
Dialogue: 0,0:07:52.98,0:07:57.46,Default,,0000,0000,0000,,intuition for the relationship between the\Nelasticity and total revenue. So revenue
Dialogue: 0,0:07:57.64,0:07:59.32,Default,,0000,0000,0000,,is price times quantity.
Dialogue: 0,0:07:59.32,0:08:04.94,Default,,0000,0000,0000,,Now suppose the price goes up by a lot and\Nthen quantity demanded goes down, just by
Dialogue: 0,0:08:05.12,0:08:10.31,Default,,0000,0000,0000,,a little bit. What then is going to be the\Nresponsive revenue? Well, if price is
Dialogue: 0,0:08:10.49,0:08:15.26,Default,,0000,0000,0000,,going up by a lot and quantity is going\Ndown just by a little bit, then revenue is
Dialogue: 0,0:08:15.44,0:08:20.90,Default,,0000,0000,0000,,also going to be going up. Now, what kind\Nof demand curve do we call that, when
Dialogue: 0,0:08:21.08,0:08:27.81,Default,,0000,0000,0000,,price goes up by a lot and quantity falls\Nby just a little bit? We call that an
Dialogue: 0,0:08:27.99,0:08:30.00,Default,,0000,0000,0000,,inelastic demand curve.
Dialogue: 0,0:08:30.81,0:08:34.65,Default,,0000,0000,0000,,So what this little thought experiment\Ntells us is that when you have an
Dialogue: 0,0:08:34.83,0:08:42.23,Default,,0000,0000,0000,,inelastic demand curve, when price goes up\Nrevenue is also going to go up, and of
Dialogue: 0,0:08:42.41,0:08:45.99,Default,,0000,0000,0000,,course, vice versa. Let's take a look at\Nthis with a graph.
Dialogue: 0,0:08:46.17,0:08:51.63,Default,,0000,0000,0000,,So here's our initial demand curve, a very\Ninelastic demand curve, at a price of $10
Dialogue: 0,0:08:51.81,0:08:57.64,Default,,0000,0000,0000,,that quantity demanded is 100 units, so\Nrevenue is 1,000. Notice that we can show
Dialogue: 0,0:08:57.82,0:09:02.37,Default,,0000,0000,0000,,revenue in the graph by price times\Nquantity. Now, just looking at the graph,
Dialogue: 0,0:09:02.55,0:09:07.86,Default,,0000,0000,0000,,look at what happens when the price goes\Nup to 20. Well, the quantity goes down by
Dialogue: 0,0:09:08.04,0:09:12.100,Default,,0000,0000,0000,,just a little bit, in this case to 90, but\Nrevenues go up to 1,800.
Dialogue: 0,0:09:13.61,0:09:21.46,Default,,0000,0000,0000,,So you can just see, by sketching the\Nlittle graph, what happens to revenues
Dialogue: 0,0:09:21.64,0:09:25.77,Default,,0000,0000,0000,,when price goes up when you have an\Ninelastic demand curve. And again, vice
Dialogue: 0,0:09:25.95,0:09:30.24,Default,,0000,0000,0000,,versa. Let's take a look about what\Nhappens when you have an elastic demand
Dialogue: 0,0:09:30.42,0:09:35.17,Default,,0000,0000,0000,,curve. So let's do the same kind of little\Nthought experiment, revenue is price times
Dialogue: 0,0:09:35.35,0:09:41.11,Default,,0000,0000,0000,,quantity. Suppose price goes up by a\Nmodest amount and quantity goes down by a
Dialogue: 0,0:09:41.29,0:09:45.69,Default,,0000,0000,0000,,lot. Well, if price is going up by a\Nlittle bit and quantity is going down by a
Dialogue: 0,0:09:45.87,0:09:51.99,Default,,0000,0000,0000,,lot, then revenue must also be falling.\NAnd what type of demand curve is it when
Dialogue: 0,0:09:52.17,0:09:55.87,Default,,0000,0000,0000,,price goes up by a little bit, quantity\Nfalls by a lot? What type of demand curve
Dialogue: 0,0:09:56.05,0:09:59.18,Default,,0000,0000,0000,,is that? That's an elastic demand curve.
Dialogue: 0,0:09:59.79,0:10:05.66,Default,,0000,0000,0000,,So revenues fall as price rises with an\Nelastic demand curve. And again, let's
Dialogue: 0,0:10:05.84,0:10:10.96,Default,,0000,0000,0000,,show that. If you're ever confused and you\Ncan't quite remember, just draw the graph.
Dialogue: 0,0:10:10.96,0:10:16.07,Default,,0000,0000,0000,,I can never remember, myself, but I always\Ndraw these little graphs. So draw a really
Dialogue: 0,0:10:16.25,0:10:22.78,Default,,0000,0000,0000,,flatter, elastic demand curve. In this\Ncase, at a price of $10, the quantity
Dialogue: 0,0:10:22.78,0:10:29.75,Default,,0000,0000,0000,,demanded is 250 units. So revenues is\N2,500. And see what happens, when price
Dialogue: 0,0:10:29.75,0:10:35.55,Default,,0000,0000,0000,,goes up, price goes up to $20, quantity\Ndemanded falls to 50,
Dialogue: 0,0:10:35.55,0:10:37.64,Default,,0000,0000,0000,,so revenue falls to 1,000.
Dialogue: 0,0:10:38.02,0:10:44.09,Default,,0000,0000,0000,,And again, you can just compare the sizes\Nof these revenue rectangles to see which
Dialogue: 0,0:10:44.09,0:10:50.15,Default,,0000,0000,0000,,way the relationship goes. And of course\Nthis also implies, going from $20, the
Dialogue: 0,0:10:50.15,0:10:56.72,Default,,0000,0000,0000,,price of $20 to the price of $10, revenues\Nincrease. So with an elastic demand curve,
Dialogue: 0,0:10:56.72,0:11:00.25,Default,,0000,0000,0000,,when price goes down revenues go up.
Dialogue: 0,0:11:01.30,0:11:04.87,Default,,0000,0000,0000,,So here's a summary of these\Nrelationships. When the elasticity of
Dialogue: 0,0:11:04.87,0:11:08.86,Default,,0000,0000,0000,,demand is less than one, that's an\Ninelastic demand curve and price and
Dialogue: 0,0:11:08.86,0:11:11.90,Default,,0000,0000,0000,,revenue move together. When one goes up\Nthe other goes up.
Dialogue: 0,0:11:11.90,0:11:13.48,Default,,0000,0000,0000,,When one goes down, the other goes down.
Dialogue: 0,0:11:13.48,0:11:18.80,Default,,0000,0000,0000,,If the elasticity demand is greater than\None, that's an elastic demand curve and
Dialogue: 0,0:11:18.80,0:11:23.37,Default,,0000,0000,0000,,price and revenue move in opposite\Ndirections. And could you guess what
Dialogue: 0,0:11:23.37,0:11:27.83,Default,,0000,0000,0000,,happens if the elasticity demand is equal\Nto one, if you have a unit elastic curve?
Dialogue: 0,0:11:27.83,0:11:31.99,Default,,0000,0000,0000,,Well then, when the price changes,\Nrevenue stays the same.
Dialogue: 0,0:11:32.68,0:11:38.55,Default,,0000,0000,0000,,Now, if you have to, again, memorize\Nthese, but it's really much better to just
Dialogue: 0,0:11:38.55,0:11:42.67,Default,,0000,0000,0000,,sketch some graphs. I never remember them,\Nas I've said myself, I never remember
Dialogue: 0,0:11:42.67,0:11:46.99,Default,,0000,0000,0000,,these relationships, but I can always\Nsketch an inelastic graph and then with a
Dialogue: 0,0:11:46.99,0:11:51.77,Default,,0000,0000,0000,,few changes in price I can see whether the\Nrevenue rectangles are getting bigger or
Dialogue: 0,0:11:51.77,0:11:57.91,Default,,0000,0000,0000,,smaller and so I'll be able to recompute\Nall of these relationships pretty easily.
Dialogue: 0,0:11:59.33,0:12:03.21,Default,,0000,0000,0000,,Here's a quick practice question. The\Nelasticity of demand for eggs has been
Dialogue: 0,0:12:03.39,0:12:09.28,Default,,0000,0000,0000,,estimated to be 0.1. If egg producers\Nraise their prices by 10%, what will
Dialogue: 0,0:12:09.46,0:12:16.06,Default,,0000,0000,0000,,happen to their total revenues? Increase?\NDecrease? Or it won't change?
Dialogue: 0,0:12:16.24,0:12:21.98,Default,,0000,0000,0000,,Okay, how should we approach this problem?\NIf the elasticity of demand is 0.1, what
Dialogue: 0,0:12:22.16,0:12:29.28,Default,,0000,0000,0000,,type of demand curve? Inelastic demand.\NNow, what's the relationship between an
Dialogue: 0,0:12:29.46,0:12:34.78,Default,,0000,0000,0000,,inelastic demand curve? When price goes\Nup, what happens to revenue? If you're not
Dialogue: 0,0:12:34.96,0:12:38.12,Default,,0000,0000,0000,,sure, if you don't remember, draw some\Ngraphs. Draw an inelastic,
Dialogue: 0,0:12:38.12,0:12:39.85,Default,,0000,0000,0000,,draw an elastic, figure it out.
Dialogue: 0,0:12:40.53,0:12:45.87,Default,,0000,0000,0000,,Okay, let's see. What happens? Revenue\Nincreases, right? If you have an inelastic
Dialogue: 0,0:12:46.05,0:12:50.65,Default,,0000,0000,0000,,demand curve and price goes up revenue\Ngoes up as well.
Dialogue: 0,0:12:50.83,0:12:57.30,Default,,0000,0000,0000,,Here's an application. Why is the war on\Ndrugs so hard to win? Well, drugs are
Dialogue: 0,0:12:57.48,0:13:04.46,Default,,0000,0000,0000,,typically going to have a fairly inelastic\Ndemand curve. What that means is that when
Dialogue: 0,0:13:04.64,0:13:09.51,Default,,0000,0000,0000,,enforcement actions raise the price of\Ndrugs, make it more costly to get drugs,
Dialogue: 0,0:13:09.69,0:13:15.52,Default,,0000,0000,0000,,raising the price, that means the total\Nrevenue for the drug dealers goes up. So
Dialogue: 0,0:13:15.70,0:13:19.83,Default,,0000,0000,0000,,check out this graph. Here is the price\Nwith no prohibition, here's our demand
Dialogue: 0,0:13:20.01,0:13:21.87,Default,,0000,0000,0000,,curve, our inelastic demand curve.
Dialogue: 0,0:13:22.35,0:13:27.14,Default,,0000,0000,0000,,What prohibition does, is it raises the\Ncost of supplying the good. But that
Dialogue: 0,0:13:27.32,0:13:31.83,Default,,0000,0000,0000,,raises the price, which is what it's\Nsupposed to do, and that does reduce the
Dialogue: 0,0:13:32.01,0:13:37.58,Default,,0000,0000,0000,,quantity demanded of the drug. But it also\Nhas the effect of increasing seller
Dialogue: 0,0:13:37.76,0:13:43.30,Default,,0000,0000,0000,,revenues. And seller revenues may be where\Nmany of the problems of drug prohibition
Dialogue: 0,0:13:43.48,0:13:49.91,Default,,0000,0000,0000,,come from. It's the seller revenues which\Ndrive the violence, which drive the gun,
Dialogue: 0,0:13:50.09,0:13:55.29,Default,,0000,0000,0000,,which make it look good to be a drug\Ndealer, which encourage people to become
Dialogue: 0,0:13:55.47,0:13:57.26,Default,,0000,0000,0000,,drug dealers, and so forth.
Dialogue: 0,0:13:57.67,0:14:02.36,Default,,0000,0000,0000,,So there's a real difficulty with\Nprohibition, with prohibiting a good,
Dialogue: 0,0:14:02.54,0:14:05.42,Default,,0000,0000,0000,,especially when it has an\Ninelastic demand.
Dialogue: 0,0:14:06.00,0:14:09.76,Default,,0000,0000,0000,,Here's another application of elasticity\Nof demand and how it can be used to
Dialogue: 0,0:14:09.94,0:14:14.73,Default,,0000,0000,0000,,understand our world. This is a quotation\Nfrom 2012 from
Dialogue: 0,0:14:14.73,0:14:16.64,Default,,0000,0000,0000,,NPRs food blog "The Salt."
Dialogue: 0,0:14:17.60,0:14:21.91,Default,,0000,0000,0000,,"You've all heard a lot about this year's\Ndevastating drought in the Midwest, right?
Dialogue: 0,0:14:22.09,0:14:26.27,Default,,0000,0000,0000,,US Department of Agriculture announced\Nlast Friday that the average US cornfield
Dialogue: 0,0:14:26.45,0:14:33.29,Default,,0000,0000,0000,,this year will yield less per acre than it\Nhas since 1995. Soybean yields are down,
Dialogue: 0,0:14:33.47,0:14:38.97,Default,,0000,0000,0000,,too. So you think that farmers who grow\Nthese crops must be really hurting. And
Dialogue: 0,0:14:39.15,0:14:44.90,Default,,0000,0000,0000,,that's certainly the impression you get\Nfrom media reports. But how's this, for a
Dialogue: 0,0:14:45.08,0:14:50.78,Default,,0000,0000,0000,,surprising fact? On average, corn growers\Nactually will rake in a record amount of
Dialogue: 0,0:14:50.96,0:14:53.78,Default,,0000,0000,0000,,cash from their harvest this year."
Dialogue: 0,0:14:54.50,0:15:00.37,Default,,0000,0000,0000,,So can you explain this secret side of the\Ndrought? I'm not going to answer this
Dialogue: 0,0:15:00.55,0:15:05.70,Default,,0000,0000,0000,,question. This is exactly the type of\Nquestion you might receive on an exam. But
Dialogue: 0,0:15:05.88,0:15:09.26,Default,,0000,0000,0000,,you should be able to answer it by now,\Nwith a few sketches on a piece of paper.
Dialogue: 0,0:15:09.44,0:15:14.25,Default,,0000,0000,0000,,And in particular, what I want you to\Nanswer is, what type of demand curve, for
Dialogue: 0,0:15:14.43,0:15:20.67,Default,,0000,0000,0000,,corn, would make exactly this type of\Noutcome perfectly understandable? Not a
Dialogue: 0,0:15:20.85,0:15:24.06,Default,,0000,0000,0000,,secret or surprise, but perfectly\Nunderstandable.
Dialogue: 0,0:15:25.24,0:15:29.56,Default,,0000,0000,0000,,Okay, that's the elasticity of demand.\NNext time we'll be taking up the
Dialogue: 0,0:15:29.74,0:15:33.44,Default,,0000,0000,0000,,elasticity of supply, and we'll be able to\Nmove through that material much quicker
Dialogue: 0,0:15:33.62,0:15:37.41,Default,,0000,0000,0000,,because it covers many similar concepts.\NThanks.
Dialogue: 0,0:15:39.43,0:15:42.66,Default,,0000,0000,0000,,- If you want to test yourself, click\NPractice Questions
Dialogue: 0,0:15:43.36,0:15:46.73,Default,,0000,0000,0000,,or if you're ready to move on,\Njust click Next Video.