2.4. Price Elasticities of Demand and the Linear Demand Curve

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Microeconomics Principles

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University of Illinois at Urbana-Champaign

Microeconomics Principles

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This course offers an introduction to the functions of individual decision-makers—both consumers and producers—within the larger economic system. Emphasis is on the nature and functions of product markets, the theory of the firm under varying conditions of competition and monopoly, and the role of government in promoting efficiency in the economy. Most people make the incorrect assumption that economics is ONLY the study of money. My primary goal in this course is to shatter this belief. During this course, we will be addressing the above questions as well as many more relating to: -the environment -love and marriage -crime -labor markets -education -politics -sports -business My main goal is to show you the way economists think and how to use this analytical system to answer questions related not only to these and other important human issues, but to anything you end up doing with your life after this class. After all, as you will quickly find out, I believe that everything is economics!

À partir de la leçon

Elasticities

Welcome to the fourth week! This module we will cover one of my favorite economics concepts: elasticity. It is one of my favorites because of how useful it is to analyze policy implications, as well as its usefulness for business managers. This will be obvious to you when you read one of the discussion topics for this module: Should we legalize marijuana?

2.1. Definition and Classifying Price Elasticities of Demand10:21

2.2. Price Elasticity of Demand and Revenue4:46

2.3. Determinants of Price Elasticity of Demand10:45

2.4. Price Elasticities of Demand and the Linear Demand Curve5:48

Rencontrer les enseignants

Dr. José J. Vázquez-Cognet
Clinical Professor
Department of Economics

[MUSIC].

So let's look at how the two things that influence elasticity look in a diagram.

With the easiest way to, to think about this is to think about the extremes.

Right? So again remember that we're talking

about a diagram that have the quantity demanded in the horizontal axis and the

price in the vertical axis. So think about a good that is perfectly

inelastic meaning that you change a price and you consume the same thing.

Now the quantity, it doesn't matter how much the price is, people always consumer

the same, right. So, it might be an unrealistic case, but

how would the demand, how would the demand curve look like?

How do we imagine that right? Well if you, if it doesn't matter if at

P1 you consume the same as P1 you were consuming Q1 and at P2 you still consume

Q1 and at P3 you still consume the same then the microbes going to go like that.

It's going to be a, you know, a straight line, vertical line, so it kind of in a

way looks like an I, right, so this is an example of a perfectly inelastic.

Because whatever, it doesn't matter how much you price, whatever the price is,

whatever the change in price, you still consume the same.

Right? So there's no change in quantity.

Now, you can have another situation in which you change your price by a little

bit and then you lose all your demand. Right?

So when you change a P1, you're consumption of Q1.

But then you change to P2, and your consumption is 0.

You consume nothing, alright? So how would that demand for that good

will look like, well that would be kind of a straight line like this.

That will be the manual would look like that.

And that's a perfectly elastic. Kind of looks like an E, right?

And you put another thing here. So these are the two extremes.

And in between, you can have what, where most goods are, are in between.

There's no perfectly elastic good, right? There's no, probably no perfectly elastic

good but what we have is, is kind of like in between so you have.

A demand which are like this, in between. And the closer it is to the eye, the more

inelastic the good is. And the flatter it is, the more elastic

the good is. So that's the best way you can remember

how the, the inclination of the curve relates to the elasticity.

The more it looks like a vertical line, the more inelastic that good is.

The more it looks like a, a flat line, the more elastic that good is.

Now how about the position on the curve. Well that's actually easier, because it

has to do just with the price. So, what we said, again we have a

quantity amounted here and the price of the good here and the demand curve is

downward sloping like this. And what we said is that at, at, when the

good is more expensive, it tends to be more elastic and when the good is

cheaper, it tends to be more inelastic. Right?

So what we're saying is that if you move higher in this curve you're going to

become the, the elasticity is going to become more and more elastic.

And you're going to be down in this curve when the prices is really, really low

it's going to be inelastic. So you can have two different

elasticitys, your good could be elastic or inelastic depending on how much the

price is. So if that's going to be the case, then

the only conclusion you can have is that the price of your good is going to move

from, depending how you look at it, right?

If you're talking about, that's going to p two.

If you're talking about P2, a low price is going to be more elastic.

I'm sorry, more inelastic. [SOUND].

Then as you increase the price of the good.

Then it becomes more and more, your budget.

Then the good becomes, more elastic on a high price.

Your good is going to, is going to tend to be more elastic.

And that at some point from moving from inelastic to elastic has to pass through

one. Right?

So at some point it's going to have an elasticity of unitary.

So when I say is that any good at higher parts of the curve will be elastic,

passes through unitary and the lower part of the curve are going to tend to be

inelastic. The important part here is that you

remember that the demand that you can have different, your good could be

elastic or inelastic depending of where on the curve.

You can have different measures of elasticity in different parts of the

curve. One important thing to remember and I do

that now is that remember that the slope of the curve is a change in y over the

change in x. Right?

That tantamount to our, our, our demand curve is going to be the change in the

price of x over the change in the quantity of x.

Well, that's not elasticity. Remember that elasticity is the

percentage change in quantity of x to the percentage change in the price of x.

It's related but it's not the same. Right.

Now we are mostly done with elacticity. Now we have to talk about other types of

elasticity that are also importnat. two of them related to demand, income

elasticity and the cross price elasticity and another one about the supply.

So we're going to do that next. [MUSIC]

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