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Dialogue: 0,0:00:00.00,0:00:05.52,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:09.51,0:00:12.40,Default,,0000,0000,0000,,- [Alex] In our first lecture\Non the elasticity of demand,
Dialogue: 0,0:00:12.40,0:00:15.30,Default,,0000,0000,0000,,we explain the intuitive meaning\Nof elasticity.
Dialogue: 0,0:00:15.30,0:00:18.38,Default,,0000,0000,0000,,It measures the responsiveness\Nof the quantity demanded
Dialogue: 0,0:00:18.38,0:00:20.00,Default,,0000,0000,0000,,to a change in price.
Dialogue: 0,0:00:20.00,0:00:22.57,Default,,0000,0000,0000,,More responsive means more elastic.
Dialogue: 0,0:00:22.57,0:00:24.62,Default,,0000,0000,0000,,In this lecture, we're going\Nto show how to create
Dialogue: 0,0:00:24.62,0:00:27.05,Default,,0000,0000,0000,,a numeric measure of elasticity.
Dialogue: 0,0:00:27.05,0:00:30.78,Default,,0000,0000,0000,,How to calculate with some data\Non prices and quantities,
Dialogue: 0,0:00:30.78,0:00:34.86,Default,,0000,0000,0000,,what the elasticity is over a range\Nof the demand curve.
Dialogue: 0,0:00:39.76,0:00:42.99,Default,,0000,0000,0000,,So here's a more precise definition\Nof elasticity.
Dialogue: 0,0:00:42.99,0:00:46.37,Default,,0000,0000,0000,,The elasticity of demand\Nis the percentage change
Dialogue: 0,0:00:46.37,0:00:51.38,Default,,0000,0000,0000,,in quantity demanded divided\Nby the percentage change in price.
Dialogue: 0,0:00:51.99,0:00:55.59,Default,,0000,0000,0000,,So let's write it like this.\NWe have some notation here.
Dialogue: 0,0:00:55.59,0:01:00.72,Default,,0000,0000,0000,,The elasticity of demand is equal\Nto the percentage "change in".
Dialogue: 0,0:01:00.72,0:01:05.31,Default,,0000,0000,0000,,Delta is the symbol for change in,\Nso this is the percentage change
Dialogue: 0,0:01:05.31,0:01:10.10,Default,,0000,0000,0000,,in the quantity demanded\Ndivided by the percentage change
Dialogue: 0,0:01:10.10,0:01:12.65,Default,,0000,0000,0000,,in the price.
Dialogue: 0,0:01:12.65,0:01:15.86,Default,,0000,0000,0000,,That's the elasticity of demand.\NLet's give an example or two.
Dialogue: 0,0:01:17.05,0:01:21.90,Default,,0000,0000,0000,,So, if the price of oil increases\Nby 10% and over a period
Dialogue: 0,0:01:21.90,0:01:26.42,Default,,0000,0000,0000,,of several years the quantity\Ndemanded falls by 5%,
Dialogue: 0,0:01:26.42,0:01:31.60,Default,,0000,0000,0000,,then the long run elasticity\Nof demand for oil is what?
Dialogue: 0,0:01:32.81,0:01:35.55,Default,,0000,0000,0000,,Well, elasticity\Nis the percentage change
Dialogue: 0,0:01:35.55,0:01:37.99,Default,,0000,0000,0000,,and the quantity demanded.
Dialogue: 0,0:01:37.99,0:01:41.53,Default,,0000,0000,0000,,That's -5% divided\Nby the percentage change
Dialogue: 0,0:01:41.53,0:01:42.68,Default,,0000,0000,0000,,in the price.
Dialogue: 0,0:01:42.68,0:01:43.92,Default,,0000,0000,0000,,That's 10%.
Dialogue: 0,0:01:43.92,0:01:45.82,Default,,0000,0000,0000,,So the elasticity of demand
Dialogue: 0,0:01:45.82,0:01:51.39,Default,,0000,0000,0000,,is -5% divided by 10%, or -0.5.
Dialogue: 0,0:01:52.80,0:01:55.65,Default,,0000,0000,0000,,Elasticities of demand\Nare always negative
Dialogue: 0,0:01:55.65,0:01:59.67,Default,,0000,0000,0000,,because when price goes up,\Nthe quantity demanded goes down.
Dialogue: 0,0:01:59.67,0:02:02.81,Default,,0000,0000,0000,,When price goes down,\Nthe quantity demanded goes up.
Dialogue: 0,0:02:02.81,0:02:06.65,Default,,0000,0000,0000,,So we often drop the negative sign\Nand write that the elasticity
Dialogue: 0,0:02:06.65,0:02:10.09,Default,,0000,0000,0000,,of demand is 0.5.
Dialogue: 0,0:02:12.20,0:02:14.41,Default,,0000,0000,0000,,Here's some more important notation.
Dialogue: 0,0:02:15.19,0:02:18.50,Default,,0000,0000,0000,,If the absolute value\Nof the elasticity of demand
Dialogue: 0,0:02:18.50,0:02:21.07,Default,,0000,0000,0000,,is less than one,\Njust like the example
Dialogue: 0,0:02:21.07,0:02:26.29,Default,,0000,0000,0000,,we just gave for oil, we say\Nthat the demand curve is inelastic.
Dialogue: 0,0:02:26.81,0:02:30.84,Default,,0000,0000,0000,,Elasticity of demand less than one,\Nthe demand curve is inelastic.
Dialogue: 0,0:02:31.74,0:02:34.29,Default,,0000,0000,0000,,If the elasticity of demand\Nis greater than one,
Dialogue: 0,0:02:34.29,0:02:36.98,Default,,0000,0000,0000,,we say the demand curve is elastic.
Dialogue: 0,0:02:37.60,0:02:39.78,Default,,0000,0000,0000,,And if elasticity of demand\Nis equal to one,
Dialogue: 0,0:02:39.78,0:02:42.70,Default,,0000,0000,0000,,that is the knife point case,\Nthen the demand curve
Dialogue: 0,0:02:42.70,0:02:45.16,Default,,0000,0000,0000,,is unit elastic.
Dialogue: 0,0:02:45.68,0:02:49.47,Default,,0000,0000,0000,,These terms are going to come back,\Nso just keep them in mind.
Dialogue: 0,0:02:49.52,0:02:53.69,Default,,0000,0000,0000,,Inelastic: less than one.\NElastic: greater than one.
Dialogue: 0,0:02:55.38,0:02:57.64,Default,,0000,0000,0000,,So we know that elasticity\Nis the percentage change
Dialogue: 0,0:02:57.64,0:03:00.49,Default,,0000,0000,0000,,in quantity divided\Nby the percentage change in price,
Dialogue: 0,0:03:00.49,0:03:03.54,Default,,0000,0000,0000,,how do we calculate\Nthe percentage change in something?
Dialogue: 0,0:03:03.54,0:03:06.04,Default,,0000,0000,0000,,This is not so hard,\Nbut it could be a little bit tricky
Dialogue: 0,0:03:06.04,0:03:07.64,Default,,0000,0000,0000,,for the following reason.
Dialogue: 0,0:03:07.64,0:03:10.57,Default,,0000,0000,0000,,Let's suppose you're driving down\Nthe highway at 100 miles per hour.
Dialogue: 0,0:03:10.57,0:03:12.36,Default,,0000,0000,0000,,I don't recommend this,\Nbut let's just imagine
Dialogue: 0,0:03:12.36,0:03:13.56,Default,,0000,0000,0000,,that you are.
Dialogue: 0,0:03:13.56,0:03:17.54,Default,,0000,0000,0000,,You're going 100 miles per hour,\Nand now you increase speed by 50%.
Dialogue: 0,0:03:18.18,0:03:21.99,Default,,0000,0000,0000,,How fast are you going?\N150 miles per hour, right?
Dialogue: 0,0:03:21.99,0:03:24.41,Default,,0000,0000,0000,,Okay, so now you're going\N150 miles per hour.
Dialogue: 0,0:03:24.41,0:03:29.53,Default,,0000,0000,0000,,Suppose you decrease speed by 50%.\NNow, how fast are you going?
Dialogue: 0,0:03:29.53,0:03:31.84,Default,,0000,0000,0000,,75 miles per hour, right?
Dialogue: 0,0:03:31.84,0:03:34.84,Default,,0000,0000,0000,,So how is it that you can\Nincrease speed by 50%
Dialogue: 0,0:03:34.84,0:03:37.84,Default,,0000,0000,0000,,and then decrease by 50%\Nand not be back
Dialogue: 0,0:03:37.84,0:03:39.92,Default,,0000,0000,0000,,to where you started?
Dialogue: 0,0:03:39.92,0:03:42.42,Default,,0000,0000,0000,,Well the answer is,\Nis that intuitively,
Dialogue: 0,0:03:42.42,0:03:45.37,Default,,0000,0000,0000,,we have changed the base\Nby which we are calculating
Dialogue: 0,0:03:45.37,0:03:46.99,Default,,0000,0000,0000,,the percentage change.
Dialogue: 0,0:03:46.99,0:03:51.13,Default,,0000,0000,0000,,And we don't want to have\Nthis inconsistency
Dialogue: 0,0:03:51.13,0:03:53.34,Default,,0000,0000,0000,,when we calculate elasticity.
Dialogue: 0,0:03:53.34,0:03:56.15,Default,,0000,0000,0000,,We want people to get\Nthe same elasticity
Dialogue: 0,0:03:56.15,0:03:58.33,Default,,0000,0000,0000,,whether they're calculating\Nfrom the lower base
Dialogue: 0,0:03:58.33,0:03:59.95,Default,,0000,0000,0000,,or from the higher base.
Dialogue: 0,0:03:59.95,0:04:03.14,Default,,0000,0000,0000,,So, because of that, we're going\Nto use the Midpoint Formula.
Dialogue: 0,0:04:03.58,0:04:06.87,Default,,0000,0000,0000,,So, the elasticity of demand,\Npercentage change in quantity
Dialogue: 0,0:04:06.87,0:04:09.28,Default,,0000,0000,0000,,divided by the percentage\Nchange in price,
Dialogue: 0,0:04:09.28,0:04:14.62,Default,,0000,0000,0000,,that's the change in quantity\Ndivided by the average quantity
Dialogue: 0,0:04:14.62,0:04:16.23,Default,,0000,0000,0000,,times 100.
Dialogue: 0,0:04:16.23,0:04:19.43,Default,,0000,0000,0000,,That will give us the percentage\Nchange divided by
Dialogue: 0,0:04:19.43,0:04:22.80,Default,,0000,0000,0000,,the change in price\Ndivided by the average price.
Dialogue: 0,0:04:22.80,0:04:24.33,Default,,0000,0000,0000,,Again, that times 100.
Dialogue: 0,0:04:24.33,0:04:27.64,Default,,0000,0000,0000,,Notice, since we've actually got\N100 on top and 100 on the bottom,
Dialogue: 0,0:04:27.64,0:04:30.09,Default,,0000,0000,0000,,those 100s we can actually\Ncancel out.
Dialogue: 0,0:04:30.99,0:04:33.72,Default,,0000,0000,0000,,Let's expand this\Njust a little bit more.
Dialogue: 0,0:04:33.72,0:04:36.90,Default,,0000,0000,0000,,The change in quantity.\NWhat is the change in quantity?
Dialogue: 0,0:04:36.90,0:04:39.02,Default,,0000,0000,0000,,Well, let's suppose\Nwe have two quantities.
Dialogue: 0,0:04:39.02,0:04:41.04,Default,,0000,0000,0000,,Let's call them after and before.
Dialogue: 0,0:04:41.04,0:04:44.15,Default,,0000,0000,0000,,It doesn't matter which one\Nwe call after or which one before.
Dialogue: 0,0:04:44.15,0:04:48.20,Default,,0000,0000,0000,,So, we're going to then expand this\Nto the change in quantity.
Dialogue: 0,0:04:48.20,0:04:52.64,Default,,0000,0000,0000,,That's Q after minus Q before\Ndivided by the average,
Dialogue: 0,0:04:52.64,0:04:56.00,Default,,0000,0000,0000,,Q after plus Q before,\Ndivided by two,
Dialogue: 0,0:04:56.00,0:05:00.70,Default,,0000,0000,0000,,divided by the change in price,\NP after minus P before,
Dialogue: 0,0:05:00.70,0:05:04.40,Default,,0000,0000,0000,,divided by the average price,\Nb after plus b before,
Dialogue: 0,0:05:04.40,0:05:05.68,Default,,0000,0000,0000,,divide by two.
Dialogue: 0,0:05:05.68,0:05:09.92,Default,,0000,0000,0000,,So that's a little bit of a mouthful,\Nbut everything, I think,
Dialogue: 0,0:05:09.92,0:05:11.30,Default,,0000,0000,0000,,is fairly simple.
Dialogue: 0,0:05:11.30,0:05:17.85,Default,,0000,0000,0000,,Just remember change in quantity\Ndivided by the average quantity
Dialogue: 0,0:05:17.85,0:05:20.20,Default,,0000,0000,0000,,and you should always be able\Nto calculate this.
Dialogue: 0,0:05:20.61,0:05:22.26,Default,,0000,0000,0000,,Let's give an example.
Dialogue: 0,0:05:23.29,0:05:25.24,Default,,0000,0000,0000,,Okay, here's an example\Nof a type of problem
Dialogue: 0,0:05:25.24,0:05:28.66,Default,,0000,0000,0000,,you might see on a quiz\Nor a mid term.
Dialogue: 0,0:05:28.66,0:05:32.75,Default,,0000,0000,0000,,At the initial price of $10,\Nthe quantity demanded is 100.
Dialogue: 0,0:05:32.75,0:05:36.58,Default,,0000,0000,0000,,When the price rises to $20,\Nthe quantity demanded
Dialogue: 0,0:05:36.58,0:05:38.29,Default,,0000,0000,0000,,falls to 90.
Dialogue: 0,0:05:38.29,0:05:41.35,Default,,0000,0000,0000,,What is the elasticity is, \Nwhat is the elasticity over
Dialogue: 0,0:05:41.35,0:05:43.61,Default,,0000,0000,0000,,this range of the demand curve?
Dialogue: 0,0:05:43.93,0:05:46.06,Default,,0000,0000,0000,,Well, we always want\Nto begin by writing down
Dialogue: 0,0:05:46.06,0:05:47.73,Default,,0000,0000,0000,,what we know -- our formula.
Dialogue: 0,0:05:47.73,0:05:49.77,Default,,0000,0000,0000,,The elasticity of demand\Nis the percentage change
Dialogue: 0,0:05:49.77,0:05:52.79,Default,,0000,0000,0000,,in quantity divided\Nby the percentage change in price.
Dialogue: 0,0:05:52.79,0:05:55.22,Default,,0000,0000,0000,,Now, let's remember\Nto just expand that.
Dialogue: 0,0:05:55.22,0:05:59.58,Default,,0000,0000,0000,,That's Delta Q over the average Q\Nall divided by Delta P
Dialogue: 0,0:05:59.58,0:06:00.99,Default,,0000,0000,0000,,over the average P.
Dialogue: 0,0:06:00.99,0:06:03.77,Default,,0000,0000,0000,,Now, we just start\Nto fill things in.
Dialogue: 0,0:06:03.77,0:06:09.64,Default,,0000,0000,0000,,So our quantity after, okay,\Nafter the change is 90.
Dialogue: 0,0:06:09.64,0:06:13.78,Default,,0000,0000,0000,,Our quantity before that was 100.
Dialogue: 0,0:06:14.44,0:06:16.28,Default,,0000,0000,0000,,So on the top,\Nthe percentage change
Dialogue: 0,0:06:16.28,0:06:21.07,Default,,0000,0000,0000,,in quantity is 90 minus 100\Ndivided by 90 plus 100, over two.
Dialogue: 0,0:06:21.07,0:06:23.32,Default,,0000,0000,0000,,That is the average quantity.
Dialogue: 0,0:06:23.32,0:06:25.46,Default,,0000,0000,0000,,And then on the bottom,\Nand the only trick here
Dialogue: 0,0:06:25.46,0:06:29.15,Default,,0000,0000,0000,,is always write it\Nin the same order,
Dialogue: 0,0:06:29.15,0:06:33.30,Default,,0000,0000,0000,,so if you put the 90 here,\Nthen make sure you put the 20,
Dialogue: 0,0:06:33.30,0:06:35.35,Default,,0000,0000,0000,,the number the price\Nwhich is associated
Dialogue: 0,0:06:35.35,0:06:38.33,Default,,0000,0000,0000,,with that quantity started off\Nthe same way.
Dialogue: 0,0:06:38.33,0:06:40.66,Default,,0000,0000,0000,,So, always just keep it\Nin the same order.
Dialogue: 0,0:06:40.66,0:06:43.40,Default,,0000,0000,0000,,So on the bottom, then,\Nwe have the quantity --
Dialogue: 0,0:06:43.40,0:06:46.36,Default,,0000,0000,0000,,the price after -- which is 20\Nminus the price before,
Dialogue: 0,0:06:46.36,0:06:49.18,Default,,0000,0000,0000,,which is 10, divided\Nby the average price.
Dialogue: 0,0:06:49.18,0:06:51.82,Default,,0000,0000,0000,,And now, just, it's numerics.
Dialogue: 0,0:06:52.18,0:06:55.53,Default,,0000,0000,0000,,You plug in the numbers\Nand what you get is the elasticity
Dialogue: 0,0:06:55.53,0:07:00.56,Default,,0000,0000,0000,,of demand is equal to -0.158,\Napproximately.
Dialogue: 0,0:07:00.56,0:07:02.63,Default,,0000,0000,0000,,We can always drop\Nthe negative sign
Dialogue: 0,0:07:02.63,0:07:04.38,Default,,0000,0000,0000,,because these things,\Nelasticity of demands,
Dialogue: 0,0:07:04.38,0:07:05.65,Default,,0000,0000,0000,,are always negative.
Dialogue: 0,0:07:05.65,0:07:08.34,Default,,0000,0000,0000,,So it's equal to 0.158.
Dialogue: 0,0:07:08.34,0:07:12.45,Default,,0000,0000,0000,,So does this make the elasticity\Nof demand over this range
Dialogue: 0,0:07:12.45,0:07:15.87,Default,,0000,0000,0000,,elastic or inelastic?
Dialogue: 0,0:07:17.44,0:07:19.00,Default,,0000,0000,0000,,Inelastic, right?
Dialogue: 0,0:07:19.00,0:07:21.10,Default,,0000,0000,0000,,The elasticity of demand\Nwe've just calculated
Dialogue: 0,0:07:21.10,0:07:24.66,Default,,0000,0000,0000,,is less than one,\Nso that makes this one inelastic.
Dialogue: 0,0:07:24.74,0:07:26.11,Default,,0000,0000,0000,,There you go.
Dialogue: 0,0:07:27.16,0:07:28.92,Default,,0000,0000,0000,,We need to cover one more\Nimportant point
Dialogue: 0,0:07:28.92,0:07:32.28,Default,,0000,0000,0000,,about the elasticity of demand,\Nand that is its relationship
Dialogue: 0,0:07:32.28,0:07:34.30,Default,,0000,0000,0000,,to total revenue.
Dialogue: 0,0:07:34.30,0:07:37.16,Default,,0000,0000,0000,,So a firm's revenues\Nare very simply equal
Dialogue: 0,0:07:37.16,0:07:40.38,Default,,0000,0000,0000,,to price times quantity sold.
Dialogue: 0,0:07:40.38,0:07:42.96,Default,,0000,0000,0000,,Revenue is equal\Nto price times quantity.
Dialogue: 0,0:07:42.96,0:07:45.71,Default,,0000,0000,0000,,Now, elasticity, it's all about\Nthe relationship
Dialogue: 0,0:07:45.71,0:07:47.76,Default,,0000,0000,0000,,between price and quantity,
Dialogue: 0,0:07:47.76,0:07:51.30,Default,,0000,0000,0000,,and so it's also going\Nto have implications for revenue.
Dialogue: 0,0:07:52.29,0:07:54.44,Default,,0000,0000,0000,,Let's give some intuition\Nfor the relationship
Dialogue: 0,0:07:54.44,0:07:57.13,Default,,0000,0000,0000,,between the elasticity\Nand total revenue.
Dialogue: 0,0:07:57.13,0:07:59.28,Default,,0000,0000,0000,,So revenue is price times quantity.
Dialogue: 0,0:07:59.28,0:08:03.88,Default,,0000,0000,0000,,Now suppose the price goes up\Nby a lot and then quantity demanded
Dialogue: 0,0:08:03.88,0:08:06.67,Default,,0000,0000,0000,,goes down, just by a little bit.
Dialogue: 0,0:08:06.67,0:08:09.66,Default,,0000,0000,0000,,What then is going to be\Nthe responsive revenue?
Dialogue: 0,0:08:09.66,0:08:12.54,Default,,0000,0000,0000,,Well, if price is going up\Nby a lot and quantity
Dialogue: 0,0:08:12.54,0:08:15.22,Default,,0000,0000,0000,,is going down just by a little bit,\Nthen revenue
Dialogue: 0,0:08:15.22,0:08:17.82,Default,,0000,0000,0000,,is also going to be going up.
Dialogue: 0,0:08:17.82,0:08:21.90,Default,,0000,0000,0000,,Now, what kind of demand curve\Ndo we call that, when price goes up
Dialogue: 0,0:08:21.90,0:08:25.70,Default,,0000,0000,0000,,by a lot and quantity falls \Nby just a little bit?
Dialogue: 0,0:08:26.32,0:08:30.44,Default,,0000,0000,0000,,We call that\Nan inelastic demand curve.
Dialogue: 0,0:08:30.44,0:08:33.27,Default,,0000,0000,0000,,So, what this little thought\Nexperiment tells us
Dialogue: 0,0:08:33.27,0:08:36.84,Default,,0000,0000,0000,,is that when you have\Nan inelastic demand curve,
Dialogue: 0,0:08:37.32,0:08:42.36,Default,,0000,0000,0000,,when price goes up\Nrevenue is also going to go up,
Dialogue: 0,0:08:42.36,0:08:44.16,Default,,0000,0000,0000,,and of course, vice versa.
Dialogue: 0,0:08:44.16,0:08:46.29,Default,,0000,0000,0000,,Let's take a look\Nat this with a graph.
Dialogue: 0,0:08:46.29,0:08:50.75,Default,,0000,0000,0000,,So here's our initial demand curve,\Na very inelastic demand curve,
Dialogue: 0,0:08:50.75,0:08:54.78,Default,,0000,0000,0000,,at a price of $10, the quantity\Ndemanded is 100 units,
Dialogue: 0,0:08:54.78,0:08:56.70,Default,,0000,0000,0000,,so revenue is 1,000.
Dialogue: 0,0:08:56.70,0:08:58.96,Default,,0000,0000,0000,,Notice that we can show revenue\Nin the graph
Dialogue: 0,0:08:58.96,0:09:00.92,Default,,0000,0000,0000,,by price times quantity.
Dialogue: 0,0:09:00.92,0:09:03.84,Default,,0000,0000,0000,,Now, just looking at the graph,\Nlook at what happens
Dialogue: 0,0:09:03.84,0:09:05.77,Default,,0000,0000,0000,,when the price goes up to 20.
Dialogue: 0,0:09:05.77,0:09:08.78,Default,,0000,0000,0000,,Well, the quantity demanded\Ngoes down by just a little bit,
Dialogue: 0,0:09:08.78,0:09:13.11,Default,,0000,0000,0000,,in this case to 90,\Nbut revenues go up to 1,800.
Dialogue: 0,0:09:14.22,0:09:18.71,Default,,0000,0000,0000,,So you can just see,\Nby sketching the little graph,
Dialogue: 0,0:09:19.10,0:09:22.53,Default,,0000,0000,0000,,what happens to revenues\Nwhen price goes up
Dialogue: 0,0:09:22.53,0:09:25.12,Default,,0000,0000,0000,,when you have\Nan inelastic demand curve.
Dialogue: 0,0:09:25.15,0:09:26.90,Default,,0000,0000,0000,,And again, vice versa.
Dialogue: 0,0:09:27.22,0:09:29.10,Default,,0000,0000,0000,,Let's take a look\Nabout what happens
Dialogue: 0,0:09:29.10,0:09:31.03,Default,,0000,0000,0000,,when you have\Nan elastic demand curve.
Dialogue: 0,0:09:31.78,0:09:34.32,Default,,0000,0000,0000,,So let's do the same kind\Nof little thought experiment,
Dialogue: 0,0:09:34.32,0:09:36.44,Default,,0000,0000,0000,,revenue is price times quantity.
Dialogue: 0,0:09:36.44,0:09:39.37,Default,,0000,0000,0000,,Suppose price goes up\Nby a modest amount
Dialogue: 0,0:09:39.37,0:09:42.50,Default,,0000,0000,0000,,and quantity goes down\Nby a lot.
Dialogue: 0,0:09:42.50,0:09:44.86,Default,,0000,0000,0000,,Well, if price is going up\Nby a little bit and quantity
Dialogue: 0,0:09:44.86,0:09:48.74,Default,,0000,0000,0000,,is going down by a lot,\Nthen revenue must also be falling.
Dialogue: 0,0:09:48.74,0:09:52.91,Default,,0000,0000,0000,,And what type of demand curve\Nis it when price goes up
Dialogue: 0,0:09:52.91,0:09:55.21,Default,,0000,0000,0000,,by a little bit,\Nquantity falls by a lot?
Dialogue: 0,0:09:55.21,0:09:56.82,Default,,0000,0000,0000,,What type of demand curve is that?
Dialogue: 0,0:09:56.82,0:09:59.77,Default,,0000,0000,0000,,That's an elastic demand curve.
Dialogue: 0,0:09:59.77,0:10:05.00,Default,,0000,0000,0000,,So, revenues fall as price rises\Nwith an elastic demand curve.
Dialogue: 0,0:10:05.41,0:10:06.92,Default,,0000,0000,0000,,And again, let's show that.
Dialogue: 0,0:10:06.92,0:10:09.72,Default,,0000,0000,0000,,If you're ever confused\Nand you can't quite remember,
Dialogue: 0,0:10:09.72,0:10:11.07,Default,,0000,0000,0000,,just draw the graph.
Dialogue: 0,0:10:11.07,0:10:13.41,Default,,0000,0000,0000,,I can never remember, myself,\Nbut I always draw
Dialogue: 0,0:10:13.41,0:10:14.76,Default,,0000,0000,0000,,these little graphs.
Dialogue: 0,0:10:14.76,0:10:19.12,Default,,0000,0000,0000,,So, draw a really flatter,\Nelastic demand curve.
Dialogue: 0,0:10:19.12,0:10:25.03,Default,,0000,0000,0000,,In this case, at a price of $10,\Nthe quantity demanded is 250 units.
Dialogue: 0,0:10:25.03,0:10:27.57,Default,,0000,0000,0000,,So revenues is 2,500.
Dialogue: 0,0:10:27.57,0:10:30.66,Default,,0000,0000,0000,,And see what happens,\Nwhen price goes up,
Dialogue: 0,0:10:30.66,0:10:35.99,Default,,0000,0000,0000,,price goes up to $20,\Nquantity demanded falls to 50,
Dialogue: 0,0:10:35.99,0:10:38.03,Default,,0000,0000,0000,,so revenue falls to 1,000.
Dialogue: 0,0:10:38.03,0:10:40.00,Default,,0000,0000,0000,,And again, you can just compare
Dialogue: 0,0:10:40.00,0:10:43.26,Default,,0000,0000,0000,,the sizes of these\Nrevenue rectangles
Dialogue: 0,0:10:43.26,0:10:46.56,Default,,0000,0000,0000,,to see which way\Nthe relationship goes.
Dialogue: 0,0:10:46.56,0:10:51.40,Default,,0000,0000,0000,,And of course, this also implies,\Ngoing from $20, the price of $20
Dialogue: 0,0:10:51.40,0:10:54.97,Default,,0000,0000,0000,,to the price of $10,\Nrevenues increase.
Dialogue: 0,0:10:54.97,0:10:58.44,Default,,0000,0000,0000,,So with an elastic demand curve,\Nwhen price goes down,
Dialogue: 0,0:10:58.44,0:11:00.55,Default,,0000,0000,0000,,revenues go up.
Dialogue: 0,0:11:01.53,0:11:04.03,Default,,0000,0000,0000,,So here's a summary\Nof these relationships.
Dialogue: 0,0:11:04.03,0:11:06.21,Default,,0000,0000,0000,,When the elasticity of demand\Nis less than one,
Dialogue: 0,0:11:06.21,0:11:09.37,Default,,0000,0000,0000,,that's an inelastic demand curve\Nand price and revenue
Dialogue: 0,0:11:09.37,0:11:10.52,Default,,0000,0000,0000,,move together.
Dialogue: 0,0:11:10.52,0:11:11.94,Default,,0000,0000,0000,,When one goes up,\Nthe other goes up.
Dialogue: 0,0:11:11.94,0:11:13.90,Default,,0000,0000,0000,,When one goes down,\Nthe other goes down.
Dialogue: 0,0:11:13.90,0:11:16.71,Default,,0000,0000,0000,,If the elasticity of demand \Nis greater than one,
Dialogue: 0,0:11:16.71,0:11:20.02,Default,,0000,0000,0000,,that's an elastic demand curve\Nand price and revenue move
Dialogue: 0,0:11:20.02,0:11:22.12,Default,,0000,0000,0000,,in opposite directions.
Dialogue: 0,0:11:22.64,0:11:24.99,Default,,0000,0000,0000,,And could you guess what happens\Nif the elasticity of demand
Dialogue: 0,0:11:24.99,0:11:28.36,Default,,0000,0000,0000,,is equal to one --\Nif you have a unit elastic curve?
Dialogue: 0,0:11:28.36,0:11:32.60,Default,,0000,0000,0000,,Well then, when the price changes,\Nrevenue stays the same.
Dialogue: 0,0:11:32.68,0:11:36.04,Default,,0000,0000,0000,,Now, if you have to, again,\Nmemorize these,
Dialogue: 0,0:11:36.04,0:11:40.10,Default,,0000,0000,0000,,but it's really much better\Nto just sketch some graphs.
Dialogue: 0,0:11:40.10,0:11:42.15,Default,,0000,0000,0000,,I never remember them,\Nas I've said myself,
Dialogue: 0,0:11:42.15,0:11:43.94,Default,,0000,0000,0000,,I never remember\Nthese relationships,
Dialogue: 0,0:11:43.94,0:11:46.44,Default,,0000,0000,0000,,but I can always sketch\Nan inelastic graph
Dialogue: 0,0:11:46.44,0:11:49.54,Default,,0000,0000,0000,,and then with a few changes\Nin price, I can see
Dialogue: 0,0:11:49.54,0:11:52.53,Default,,0000,0000,0000,,whether the revenue rectangles\Nare getting bigger or smaller
Dialogue: 0,0:11:52.53,0:11:55.53,Default,,0000,0000,0000,,and so I'll be able to recompute
Dialogue: 0,0:11:55.53,0:11:58.32,Default,,0000,0000,0000,,all of these relationships\Npretty easily.
Dialogue: 0,0:11:59.43,0:12:01.27,Default,,0000,0000,0000,,Here's a quick practice question.
Dialogue: 0,0:12:01.27,0:12:05.27,Default,,0000,0000,0000,,The elasticity of demand for eggs\Nhas been estimated to be 0.1.
Dialogue: 0,0:12:05.78,0:12:09.82,Default,,0000,0000,0000,,If egg producers raise their prices\Nby 10%, what will happen
Dialogue: 0,0:12:09.82,0:12:15.08,Default,,0000,0000,0000,,to their total revenues? Increase?\NDecrease? Or it won't change?
Dialogue: 0,0:12:16.27,0:12:18.17,Default,,0000,0000,0000,,Okay, how should we\Napproach this problem?
Dialogue: 0,0:12:19.32,0:12:23.37,Default,,0000,0000,0000,,If the elasticity of demand is 0.1,\Nwhat type of demand curve?
Dialogue: 0,0:12:24.97,0:12:26.68,Default,,0000,0000,0000,,Inelastic demand.
Dialogue: 0,0:12:27.12,0:12:31.55,Default,,0000,0000,0000,,Now, what's the relationship\Nbetween an inelastic demand curve?
Dialogue: 0,0:12:31.82,0:12:34.44,Default,,0000,0000,0000,,When price goes up,\Nwhat happens to revenue?
Dialogue: 0,0:12:34.44,0:12:36.16,Default,,0000,0000,0000,,If you're not sure, \Nif you don't remember,
Dialogue: 0,0:12:36.16,0:12:37.47,Default,,0000,0000,0000,,draw some graphs.
Dialogue: 0,0:12:37.47,0:12:40.09,Default,,0000,0000,0000,,Draw an inelastic,\Ndraw an elastic, figure it out.
Dialogue: 0,0:12:40.67,0:12:45.06,Default,,0000,0000,0000,,Okay, let's see. What happens?\NRevenue increases, right?
Dialogue: 0,0:12:45.11,0:12:48.09,Default,,0000,0000,0000,,If you have an inelastic\Ndemand curve and price goes up,
Dialogue: 0,0:12:48.09,0:12:49.96,Default,,0000,0000,0000,,revenue goes up as well.
Dialogue: 0,0:12:50.89,0:12:52.39,Default,,0000,0000,0000,,Here's an application.
Dialogue: 0,0:12:52.43,0:12:55.57,Default,,0000,0000,0000,,Why is the war on drugs\Nso hard to win?
Dialogue: 0,0:12:56.19,0:12:58.46,Default,,0000,0000,0000,,Well, drugs are typically\Ngoing to have
Dialogue: 0,0:12:58.46,0:13:01.14,Default,,0000,0000,0000,,a fairly inelastic demand curve.
Dialogue: 0,0:13:01.99,0:13:05.93,Default,,0000,0000,0000,,What that means\Nis that when enforcement actions
Dialogue: 0,0:13:05.93,0:13:09.78,Default,,0000,0000,0000,,raise the price of drugs,\Nmake it more costly to get drugs,
Dialogue: 0,0:13:09.78,0:13:12.43,Default,,0000,0000,0000,,raising the price,\Nthat means the total revenue
Dialogue: 0,0:13:12.43,0:13:14.83,Default,,0000,0000,0000,,for the drug dealers goes up.
Dialogue: 0,0:13:15.20,0:13:17.04,Default,,0000,0000,0000,,So check out this graph.
Dialogue: 0,0:13:17.04,0:13:19.13,Default,,0000,0000,0000,,Here is the price\Nwith no prohibition,
Dialogue: 0,0:13:19.13,0:13:22.29,Default,,0000,0000,0000,,here's our demand curve,\Nour inelastic demand curve.
Dialogue: 0,0:13:22.29,0:13:24.86,Default,,0000,0000,0000,,What prohibition does,\Nis it raises the cost
Dialogue: 0,0:13:24.86,0:13:26.31,Default,,0000,0000,0000,,of supplying the good.
Dialogue: 0,0:13:26.31,0:13:30.96,Default,,0000,0000,0000,,But that raises the price,\Nwhich is what it's supposed to do,
Dialogue: 0,0:13:30.96,0:13:34.46,Default,,0000,0000,0000,,and that does reduce\Nthe quantity demanded of the drug.
Dialogue: 0,0:13:34.46,0:13:38.71,Default,,0000,0000,0000,,But it also has the effect\Nof increasing seller revenues.
Dialogue: 0,0:13:38.98,0:13:42.31,Default,,0000,0000,0000,,And seller revenues may be\Nwhere many of the problems
Dialogue: 0,0:13:42.31,0:13:44.47,Default,,0000,0000,0000,,of drug prohibition come from.
Dialogue: 0,0:13:44.47,0:13:47.64,Default,,0000,0000,0000,,It's the seller revenues\Nwhich drive the violence,
Dialogue: 0,0:13:47.64,0:13:52.01,Default,,0000,0000,0000,,which drive the guns,\Nwhich make it look good
Dialogue: 0,0:13:52.01,0:13:54.67,Default,,0000,0000,0000,,to be a drug dealer,\Nwhich encourage people
Dialogue: 0,0:13:54.67,0:13:57.37,Default,,0000,0000,0000,,to become drug dealers,\Nand so forth.
Dialogue: 0,0:13:57.80,0:14:01.10,Default,,0000,0000,0000,,So there's a real difficulty\Nwith prohibition,
Dialogue: 0,0:14:01.10,0:14:03.53,Default,,0000,0000,0000,,with prohibiting a good,\Nespecially when it has
Dialogue: 0,0:14:03.53,0:14:05.62,Default,,0000,0000,0000,,an inelastic demand.
Dialogue: 0,0:14:06.18,0:14:08.86,Default,,0000,0000,0000,,Here's another application\Nof elasticity of demand
Dialogue: 0,0:14:08.86,0:14:11.44,Default,,0000,0000,0000,,and how it can be used\Nto understand our world.
Dialogue: 0,0:14:11.86,0:14:16.74,Default,,0000,0000,0000,,This is a quotation from 2012\Nfrom NPRs food blog "The Salt."
Dialogue: 0,0:14:17.21,0:14:18.32,Default,,0000,0000,0000,,"You've all heard a lot
Dialogue: 0,0:14:18.32,0:14:21.50,Default,,0000,0000,0000,,about this year's devastating\Ndrought in the Midwest, right?
Dialogue: 0,0:14:21.86,0:14:24.69,Default,,0000,0000,0000,,US Department of Agriculture\Nannounced last Friday
Dialogue: 0,0:14:24.73,0:14:29.19,Default,,0000,0000,0000,,that the average US cornfield\Nthis year will yield less per acre
Dialogue: 0,0:14:29.19,0:14:31.87,Default,,0000,0000,0000,,than it has since 1995.
Dialogue: 0,0:14:32.43,0:14:34.19,Default,,0000,0000,0000,,Soybean yields are down, too.
Dialogue: 0,0:14:34.71,0:14:37.10,Default,,0000,0000,0000,,So you think that farmers\Nwho grow these crops
Dialogue: 0,0:14:37.10,0:14:38.99,Default,,0000,0000,0000,,must be really hurting.
Dialogue: 0,0:14:38.99,0:14:42.88,Default,,0000,0000,0000,,And that's certainly the impression\Nyou get from media reports.
Dialogue: 0,0:14:44.10,0:14:46.35,Default,,0000,0000,0000,,But how's this,\Nfor a surprising fact?
Dialogue: 0,0:14:46.35,0:14:49.61,Default,,0000,0000,0000,,On average, corn growers\Nactually will rake in
Dialogue: 0,0:14:49.61,0:14:53.88,Default,,0000,0000,0000,,a record amount of cash\Nfrom their harvest this year."
Dialogue: 0,0:14:55.10,0:14:58.78,Default,,0000,0000,0000,,So can you explain this secret side\Nof the drought?
Dialogue: 0,0:14:59.30,0:15:01.02,Default,,0000,0000,0000,,I'm not going to answer\Nthis question.
Dialogue: 0,0:15:01.02,0:15:03.54,Default,,0000,0000,0000,,This is exactly the type\Nof question you might receive
Dialogue: 0,0:15:03.54,0:15:05.09,Default,,0000,0000,0000,,on an exam.
Dialogue: 0,0:15:05.09,0:15:07.60,Default,,0000,0000,0000,,But you should be able\Nto answer it by now,
Dialogue: 0,0:15:07.60,0:15:09.88,Default,,0000,0000,0000,,with a few sketches\Non a piece of paper.
Dialogue: 0,0:15:09.95,0:15:12.37,Default,,0000,0000,0000,,And in particular, what I want you\Nto answer is,
Dialogue: 0,0:15:12.37,0:15:17.01,Default,,0000,0000,0000,,what type of demand curve,\Nfor corn, would make exactly
Dialogue: 0,0:15:17.01,0:15:20.68,Default,,0000,0000,0000,,this type of outcome\Nperfectly understandable?
Dialogue: 0,0:15:20.68,0:15:24.46,Default,,0000,0000,0000,,Not a secret or surprise,\Nbut perfectly understandable.
Dialogue: 0,0:15:25.31,0:15:28.09,Default,,0000,0000,0000,,Okay, that's the elasticity\Nof demand.
Dialogue: 0,0:15:28.09,0:15:31.22,Default,,0000,0000,0000,,Next time we'll be taking up\Nthe elasticity of supply,
Dialogue: 0,0:15:31.22,0:15:33.70,Default,,0000,0000,0000,,and we'll be able to move\Nthrough that material much quicker
Dialogue: 0,0:15:33.70,0:15:36.84,Default,,0000,0000,0000,,because it covers\Nmany similar concepts.
Dialogue: 0,0:15:36.84,0:15:38.46,Default,,0000,0000,0000,,Thanks.
Dialogue: 0,0:15:39.47,0:15:41.30,Default,,0000,0000,0000,,- [Narrator] If you want\Nto test yourself,
Dialogue: 0,0:15:41.30,0:15:45.29,Default,,0000,0000,0000,,click Practice Questions,\Nor if you're ready to move on,
Dialogue: 0,0:15:45.29,0:15:47.06,Default,,0000,0000,0000,,just click Next Video.
Dialogue: 0,0:15:47.09,0:15:50.88,Default,,0000,0000,0000,,♪ [music] ♪