Elasticity

  

Remember the song, "Rubberband Man"? Well, ask your parents.

Elasticity measures how responsive we are to a change in something else. Put metaphorically, if you will: being elastic means you sway when the wind blows, while being inelastic means you’re solid as a rock when the wind blows.

Sun, rain, or snow, some people will always be wearing a Hawaiian shirt and flip flops like it ain’t no thang. These freaks of nature are not very responsive with their clothing choices to changes in weather, making them inelastic to weather.

What about your average modern Joe who grabs a jacket when it’s cool out, and switches out sandals for shoes? When the weather changes a bit, so does average modern Joe’s clothing, suggesting he’s supes elastic to weather changes.

In economics, elasticity is usually used to measure changes in quantity as a result of changes in price. For example, some people might buy more of something when it’s on sale while others will remain inelastic, still buying the same amount as they would have if there was no sale. Elasticities apply to firms, too. For instance, they might hire more workers if worker supply goes up, causing wages to go down.

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Econ: What is elasticity?3 Views

00:00

And finance Allah Shmoop what is elasticity Socks underwear rubber

00:10

bands slingshots Olympic gymnasts What do these things have in

00:14

common while they can stretch In other words they're elastic

00:18

This concept comes up in economics It's called drum roll

00:21

Please elasticity Shocker bullet measures How much One economic variable

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changes when a change is made to another economic variable

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Well the most common situation has to do with demand

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Like how much does demand change when there's a change

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in price I eat price elasticity of demand That's how

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you kind of phrase it Well think of it as

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meaning or implying how far consumers will stretch their willingness

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to buy as price increases like lifesaving prescription drugs Often

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there's only one drug that Khun treat a specific disease

00:58

particularly rare ones out there Well don't take that drug

01:01

and you die People will pay you almost anything to

01:04

get it Items like that are said to have in

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elastic demand Changes in price don't do much to dent

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demand Just grab him out and it looks pretty steep

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You know prices go up but demand only changes a

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little tiny bit Think gasoline and cigarettes Yeah like that

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You need him on the other side Of the spectrum

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There are items that have highly elastic demand Little price

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changes can dramatically alter whether someone is willing to buy

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a product or not Graph him out on the line

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looks very flat Let's take ketchup I always do It

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goes great on hot dogs So we have some hotshot

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new V P at Heinz ketchup and they decide the

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brand name of Heinz is worth double any other crushed

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tomatoes and a whole bunch of sugar Well anyway they

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raise prices So heights now is six dollars for ah

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big semi partial gallon of ketchup right there but the

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generic Safeway brand or the generic other brand you've never

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heard of There are only two dollars and fifty cents

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and ketchups kind of ketchup Consumers aren't really that loyal

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to it So when you raise prices who bad things

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happen behind because well the loyalty that the new VP

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of thought that there would be two hind sketch up

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wasn't there and consumers were just fine at less than

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half the price for the generic brand Yeah very elastic

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demand There you raise prices a little bit and boom

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volume declines All right so what affects elasticity Well the

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first question asked Are there any substitutes you can buy

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Prescription drugs might be highly elastic until the generic version

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comes out You know kinda like the catch up thing

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Right Then all of a sudden the name brand version

02:41

loses a lot of its pricing power Right Well another

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key question What kind of commodity is it like Is

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it a necessity or a luxury like waters A necessity

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but lots of substitutes for the way you buy water

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Right And how high is the price level To start

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What Manufacturers can probably sneak a five percent price increase

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you know on say a dollar package gun But that

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same five percent price increase to a Mercedes Well that

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would bump the price of it You know like several

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thousand dollars right They start out at seventy grand You

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raised five cents and thirty five hundred bucks Thank you

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very much All right Well can you wait to buy

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that car then Kenya Well if you're planning that Mercedes

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purchased well you might be able to push it off

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a year or two if you you know think the

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price is too high Another few thousand miles on the

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odometer won't affect trade in on your old crappy Volvo

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car Too much so you drive However if you're broken

03:35

down by the side of the road in Death Valley

03:37

and the only tow truck driver within a hundred miles

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says it will be one hundred fifty dollars to come

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Get your car Well you either pay or you know

03:44

start walking How long you have The product also plays

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into the price elasticity of demand Disposable products can be

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pretty cheap and elastic in terms of price right Think

03:54

those disposable plastic razors in Scooby Doo Band aids and

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you know packs of gum But if you can get

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a long term used out of something while the price

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could be higher think stuff like refrigerators or cop water

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heaters and well yeah that Mercedes luxury Your income is

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another factor in determining elasticity as well All right going

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back to Mercedes here a five percent increase in the

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car price might put it out of your range Well

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what if we go with the used Ford Fiesta Yeah

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well I'd save you a whole bunch of money It

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was fun to drive But then if wealthier Jeff Bezos

04:26

richest man in the world for that five percent increase

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wouldn't even register Pete by the Mercedes anyway the way

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the rest of us by a hamburger for lunch And

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then well he might use it as a flowerpot in

04:37

his backyard So a lot goes into price elasticity Unfortunately

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economists have an equation for all this stuff to figure

04:43

out something's elasticity while we take the percentage change in

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the quantity of something and divide it by the percentage

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change in the price when different prices and demand levels

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and curved shapes are involved here So if the result

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gets you a number greater than or equal to one

04:59

in this little graph equation here then that product is

05:02

considered elastic meaning a change in price is highly sensitive

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It has a notable effect on demand You raise it

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a little bit in demand shrinks those easy to find

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products where there are a lot of potential substitutes Yeah

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they're usually highly elastic They compete on price Remember the

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great ketchup dilemma Yeah that's got an elasticity greater than

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one And then there's the other side of the coin

05:24

If you run the last two city equation and get

05:26

a result less than one Well then you've got an

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elastic product Consumers don't change how much they purchase one

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Prices rise Well think about gasoline We're not talking about

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the price of anyone station You know if the place

05:38

by your house jacks up prices well you'll just drive

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around the block and goto cheaper place right But if

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gas in general skyrockets like say there's a revolution in

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the Middle East or if hurricane takes out all the

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oil rigs in the Gulf of Mexico Well then gas

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prices all over the world spike But what do you

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do You know that's you grumble You complain you post

05:58

mean Twitter comments about gas state Asian owner but ultimately

06:02

you drive on over and pump the gas Well you

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don't have much of a choice here for normal people

06:06

in normal gas powered cars That's inelastic demand even when

06:10

there are big moves in price while you find a

06:13

way to pay it In other words well you're about

06:15

as flexible in that regard as that gymnast I do

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