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Learn the toughest concepts covered in your Macroeconomics class with step-by-step video tutorials and practice problems.


Price Elasticity of Demand on a Graph


Price Elasticity of Demand on a Graph

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Now let's see how elasticity can shape the demand curve on the graph. So we're gonna talk about all the different cases. But let's start here with this special case called perfectly elastic. We're also gonna have perfectly in elastic on the other end of the spectrum. So here perfectly elastic. This is when the elasticity is so big, it's infinity, right? The elasticity is huge and we get this demand curve that is just a horizontal line, right? Horizontal line. And this doesn't appear so often in the real world, but it does kind of exist in these perfectly competitive markets. So underneath you can see that I wrote wheat and foreign currency, right? These are example products that might have an elasticity of infinity. And when we think of that, it's more when we're thinking about maybe the individual farmers demand curve, right? So the idea is this farmer could make any quantity he wanted, right? He can make as much wheat as he wanted, he can make this small amount of wheat right here, right? A small quantity on our quantity access um or a huge quantity way up here on our quantity axis. And the market will buy all of it regardless. But the market will only buy it at this price right here. If you tried to charge a higher price, the market would buy none of his supply. Right? So that's the idea is there would be no demand at a different price than this price. But at this price there's an infinite demand, right? They'll they'll buy as much as they can at that price. So that's what um you'll see in the market for wheat or for foreign currency, right? There's someone out there that there's the exchange rate on the market right now say you can get a euro for, I don't know, a dollar seven or something. There's someone who will trade you thousands, tens of thousands of euros at that price. Um but if you try to charge a different price, they wouldn't be having it. Alright, so that is our perfectly elastic demand. That's one extreme of the spectrum where let's go ahead to something a little more realistic in elastic demand. And like we said, elastic demand is when our price elasticity is greater than one, right? And notice we've kind of got this kind of a steep, shallow curve, right? It's kind of almost just a little bit um less straight here. And this is most products are going to have an elastic demand like this. This is gonna be things like I've got here, beef and transportation, it's things that can be easily substituted. Right? So when something has a change in price, people are going to Uh change what they buy, right? So the idea is beef changed in price, right? If the price of beef now went up $2 per pound or something, people would go buy chicken instead or buy something else, right? So the quantity demanded of beef would be really affected by a change in price, just like transportation. Uh you know, if the price of taxi rides goes up, people are gonna take the bus instead, or if the price of cars goes up, people might take the bus or take a taxi or airplane tickets go up, people might take the bus, right? The idea is they have all these different options. So if the price changes, they're gonna take their business elsewhere and you're gonna get this elastic demand where you'll see something like this, where we've got, you know, maybe this price right here and this price right here, right. We we only changed the price just a little bit, right? Price went up just a little bit here. And what are we seeing with the quantity demanded over here? Let me use a different color for this one. So, up here, p to write notice what's happening with the quantity here, you raise that price a little bit and the quantity went way down, right, The percentage change in that quantity went way down compared to that little change in price. So that's gonna be the elastic demand. Now, let's talk about unit elastic. Now, this is a special case here, where the percentage changes are equal, right? So a 10% increase in price is gonna be a 10% decrease in quantity demanded. Um and it's hard to find real world examples of this, but I found online that actually clothing is actually pretty close to unit elastic in the sense that a store might have a 40% off sale right where they slash prices by 40% And they'll expect to sell 40% more stuff. So that's about as close as we can get to unit elastic in the real world. Um and you can see that this curve is kind of standing up a little more right now, we're gonna get situations where our percentage change in price. So the idea here is we got a percentage change in price, maybe something like this right? So this this percentage change in price here and we get a similar change in our quantity demanded. Alright, um now I want to make a quick note that in some books, I've seen them use a straight line kind of in the middle of unit elastic or excuse me, in the middle of elastic and inelastic kind of a straight line that looks like that and it's not totally correct. I mean the idea is there in the sense that we're in the middle of elastic and any elastic, but you're gonna see it further lessons that along a straight line curve. The elasticity is actually changing constantly. So it's a lot more clear to use a curve that looks like this where we kind of see a percentage change happening equally rather than a straight line where the slope is what's equal. We're gonna talk about that more. But the idea here is that you should see that this this graph is gradually kind of turning this way, right? We're kinda we started flat, horizontal, and now we're kind of going this way and this way and this way and this way, and you're gonna see where we end up here on the bottom of the page with any elastic and perfectly elastic, notice how it keeps going in that direction, right? It keeps turning up and up and up. So let's talk about this any elastic demand now, and this is where quantity demanded doesn't change that much compared to price, right? This is products usually that people are gonna need anyways. Um So a lot of times people talk about any elastic they think of cigarettes, right? That's the situation where a price change, right? The government puts a new tax or something and the price of cigarettes goes up, but people still buy cigarettes because they're addicted to it, right? Or gasoline we're addicted to gasoline in the same sense, right? We're kind of at the will of the market, we see those gas prices go up and we're still pumping gas at least in the short term. Alright, so this is what we see with the elastic, right? We're gonna see kind of this much steeper getting this way, steeper curve right where we might have this situation where we've got price and quantity, right? Where we're at this price and quantity and let's go ahead and say we raise price quite a bit here this time. So p one was here, we're gonna raise it way up here to like P. Two and notice what's happening with quantity barely changing right quantity one In quantity two compared to that change in price. That change in quantity was not that much. And that's what you can expect from any elastic products like cigarettes or gasoline. And now we have our most extreme example of, you know, in elastic is where elasticity of demand equal zero. And we get this vertical line, right? This is the other extreme of elasticity here where we're perfectly in elastic and this is very rare to find um on the market. But some good examples are actually right behind me. Let me get out of the way. You'll see I've got life saving drug and table saw. So a life saving drug. The idea here is that no matter what the price people are going to buy this anyways. Right? So life saving drug is a great example. Table salt. Not as much, but you can kind of see table salt would almost be more in elastic. But the idea that it's worth so little of our budget. Uh you're going to see that it kind of fits here too. So a life saving drug, right? This is the idea of this actually happened recently, where there was this, I believe it was an AIDS drug that was say something around $4 a pill. Some some guy bought up the company and changed the price to like hundreds of dollars per pill, right? He increased the price like crazy. And everyone was really mad because they I needed this drug right? No matter what, the price they were gonna have to buy it. And they were really upset at this huge price increase. So that's what was happening, right? The quantity demanded for this AIDS drug is going to stay constant, whether the prices down here or the price is way up here. Alright, so no matter what price we're at, you're gonna see that the demand stays the same and we can kind of see that for table salt, right? Especially when we stay at a very low price table salt is it costs not much, Right? So when we see an increase in the price of salt, people still use salt and all their meals, they love having salt at the table, right? It's just a commonplace addition to our meal time. And people aren't going to just stop buying salt because the price went up, you know, from a dollar to a dollar 50 or something like that. So you're gonna kind of see the same quantity demanded of salt regardless of the price in a range, right? So that's what we see, we see kind of going from perfectly elastic to perfectly in elastic. We see the curve kind of making this change like this and a good way I like to remember. So it's like, Oh which one's elastic, which ones in elastic? It's kind of silly, but this is the way I think of it um when I'm perfectly elastic, I'm feeling elastic. I feel, you know, I feel good, I'm tired. It's like, oh I feel super elastic right now, I'm gonna go home and lay in my bed. So that's kind of how I think of it. I'm like I'm elastic, I'm laying down and then as we get more any elastic right? We went from perfectly elastic, laying down super comfortable and now we start getting up from that situation right now the alarm went off and we're kind of like got to get up a little bit, we're like looking around now we're like sitting on the edge of the bed, like what am I doing with my life? And right now we're like got our feet down and then finally we're perfectly in elastic. We're standing up, we're on our way to class on our way to work, right? So that's how I like to think of it. It's kind of silly, but it helps you remember elastic is laying down and then we move towards any elastics standing up and you're actually gonna see that. This also works for the supply curve. So it's a it's a good method for either one, but we'll get to that in a bit. So this is how I'm gonna remember it elastic laying down all the way to standing up. Cool, let's go ahead and move on to the next video.