[MUSIC] What affects the elasticity of demand? The most important factors is the number of substitutes that are available for the good. Let's take two extreme examples. The first is frozen peas. When you go to the grocery store to buy frozen peas, you see the different brands of peas sitting right next to each other on the same shelf at the grocery store, at least that's what happens here in America. So it's very easy to compare the prices, and although different brands try to market their product as something very special, in the end, a frozen pea is a frozen pea is a frozen pea, and the substitutes are very similar to each other, so the consumers are very price sensitive. If one of the brands tries to increase their price no one's going to buy that frozen pea, and everyone is going to go to another frozen pea. On the other hand, firms often try to have sales on their brand in order to steal customers from somewhere else. They know that if they lower the price, the quantity of people who will go to their product is going to be relatively high. So this means that the demand for frozen peas is relatively responsive to price or elastic. A small change in price will cause a big change in terms of quantity demanded. Let's think of another extreme, the demand for a specific chemotherapy drug. What will happen if a drug company lowers the price of that drug? Well, they're definitely not going to encourage me to go ahead and purchase it. Thankfully, at least now, I don't need that drug, so I'm not going to buy it just because it's on sale. Even people who do need a chemotherapy drug are probably going to stick to the chemotherapy drug that's best for them and that was prescribed to them by their physician, so they will not be responsive to price. If the price goes up they probably are still going to stick to buying that drug if they can afford it, even by paying a lot of money. And indeed if the price goes down they're not going to rush and suddenly buy double the does of chemotherapy. So this means this sort of a good has a very nonresponsive demand curve, a very low elasticity. And it's because for a particular chemotherapy drug there aren't really very good substitutes. If that's the drug that's good to treat your sickness, that's it, you're going to stick with that drug. So again, the most important thing that is reflected in the elasticities is the number of substitutes. There a few other things that I want to mention. One is, what, how big is the expenditure on this good from your general budget? We usually don't care when a price changes for something that's a very small amount of our budget. For example, a package of gum. And we tend to look at prices a little bit more carefully if they're a big component of our budget. So that's another thing that will impact the responsiveness of the demand or the elasticity of demand. And the third thing that I want to mention is the amount of time that you have to adjust. And this is a very important factor when we think of goods such as gasoline. If the price of gasoline shoots up, in the short run we don't have much choice, we cannot change our behavior, we will just purchase the gasoline at the higher price. But if that price hike is sustained for a period of time, people will start changing their behavior. They'll start buying more efficient, fuel efficient cars. They might decide to move, physically move to a location that's closer to their workplace so they don't have to spend so much on gasoline. So the more time has elapsed from a change in price, the more responsive people will be in terms of changing their behaviors and therefore, in terms of the quantity demanded. So let's summarize the things that affect the elasticity of demand. Number one, and most important, is the availability of substitutes. But it's also important whether or not this is a small share or a big share of your budget and whether or not you have time to adjust to this change in price.