which of the following is likely to have the most price inelastic demand This is a topic that many people are looking for. accountabilitynowpac.com is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, accountabilitynowpac.com would like to introduce to you Introduction to price elasticity of demand AP Microeconomics Khan Academy . Following along are instructions in the video below:
“We are now going to discuss price elasticity of demand which sounds like a very very fancy concept. But really it s a way for economists to sense how sensitive quantity to change in prices and in this video. We re gonna denote it as a capital e. So e price elasticity of demand and the easy way to think about it is it is your percent change in i ll use the greek letter.
Delta as shorthand for change in here percent change in quantity over your percent change in price. And so you might say wait how does this relate to the everyday. Idea of elasticity well imagine two bands so let s imagine. An inelastic band inelastic right over here and let s imagine.
An elastic band right over here so in an inelastic band. If we apply some amount of force you re not going to be able to stretch it much it might stretch a little bit while an elastic band. If you apply that same amount of force you might be able to stretch it a lot more and so the analogy here is we re not using force. But we re saying how much does quantity stretch for a given amount of price change.
And so something where the quantity changes a lot for a given price change would be very elastic. So this the magnitude of this will be larger and if the percent change in quantity doesn t change a lot for a our given percent change in price. Well then we re dealing with an inelastic price elasticity of demand. And we ll be able to internalize these more as we work through the numbers and actually let s do that for this demand schedule that we have right over here.
And it s visualized as our demand curve in the vertical axis. We have price of burgers and then in our horizontal axis. We have quantity in terms of burgers per hour. And so let s just use this definition of price elasticity of demand to calculate it across different points on our demand curve.
I m gonna make a new column here so price elasticity of demand and the way. I m gonna do it is really the simplest method for calculating this in other videos. We can go into more in depth methods like the midpoint method and i ll show you the weakness in what we re doing right here but for the sake of say an ap economics. Microeconomics course this would be sufficient so let s think about our price elasticity of demand as we go from point a to point b.
Well remember that s just going to be our percent change in quantity over our percent change in price. So. What is our percent change in quantity well we re starting at a quantity of two so i ll put that in our denominator and we re going from two to four. So we are adding two so we have two over two we could multiply that times 100.
If we like so this would give us we have 100 change in quantity over now. What was the corresponding change in price percent change in price. So our corresponding percent change in price our initial price is nine. And we go from nine to eight.
So. We re going down by one and then we multiply that times 100 so this is going to be about a negative 11 change in price and this math is reasonably straightforward because the 100 s. Cancel out this is just a one one over negative 1 9. Is just going to be equal to negative nine.
So you have a negative nine price elasticity of demand so before i interpret that more let s look at the price elasticity of demand at other points or starting from other points. To other points. On this curve. So let s think about it going from actually let s think about it going from e to f.
So as we go from e to f..
We re going to do the same exact exercise. What is our percent change in quantity well our initial quantity is 16 and we re going from 16 to 18 so. We have a change of two so two over 16 times 100 . That is our percent change in quantity.
And what is our percent change in price well our initial price is two and we re going from two to one so. We have a price change of negative one times 100 and. So what. You see here is this is 1.
8. Times. 100 this would be. 125 up.
Here so this is 125 up. There and then this over here is going to be negative 50. . So when price went down by.
50 you had a 125. Increase. In quantity 125. Is.
1 4 of..
50 . So this is going to give us a price elasticity of demand of negative 025. So there s a couple of interesting things that you might already be realizing. One is even though our demand curve right over here is a line.
It actually has a constant slope. You see that the price elasticity of demand changes depending on different parts of the curve. Now the reason. Why this is is really just boils down to math.
When we re going from a to b our initial prices were relatively high. So even though you had a price decrease of one it was from an initial price of nine. So your percentage change in price looked fairly low. While your percentage change in quantity was high cause you re going from a low quantity of two and you re adding two to it so you had 100 change in quantity when you go to the other end our curve and you go from e to f.
It s the other way around your price starting point is low. So your percent change in price when you decrease price by one it looks like a fairly large magnitude. While your percent change in quantity. When you go from e to f.
Because you are already at a quantity of 16 adding two to that is not that large of a percentage. Now another thing you might be appreciating is if we tried to calculate the price elasticity of demand up here on the curve and instead of going from a to b. If we went from b to a we would ve gotten a different value because our initial prices and quantities would have been different our initial price. We would ve put an eight right over here and our initial quantity.
We would ve put a four over here and we would ve gotten a different value and that s one of the negatives of the technique..
Which is arguably the simplest technique that i just used there s other techniques like the midpoint technique that can give you a more consistent result. Whether you re going from a to b or b to a. But i won t cover it just yet. But let s think now about how to interpret this and the best way to interpret.
It is to think about the absolute value of the price elasticity of demand. So over here the absolute value of our price. Elasticity of demand is equal to nine and then over here the absolute value of our. Price elasticity of demand is equal to 025.
And a general rule of thumb is if your absolute value of your price elasticity of demand is less than one you are dealing with an inelastic inelastic elastic situation. And if your price elasticity of demand. The absolute value of it is greater than one you re dealing with an elastic situation. Why does that make sense well in this first scenario.
It s saying for a given percentage change in price you have a smaller percent change in quantity while here for a given percent in price you re going to have a larger than that percentage change in your quantity. So once again it goes back to these rubber band analogies. So when we re going from a to b the absolute value of our price elasticity of demand is definitely larger than one so economists would consider this to be an elastic situation. While when we go from point e.
To point f. Our price elasticity of demand or the absolute value of it is definitely less than one so this going to be an inelastic situation. ” ..
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Economists use the concept of price elasticity of demand to describe how the quantity demanded changes in response to a price change. In this video, explore a simple way to calculate the price elasticity of demand, how to interpret that calculation, and how price elasticity of demand varies along a demand curve.
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