Price Sensitivity

  

Categories: Econ

See: Inelastic Demand. See: Elastic Demand.

Hmmm...you were going to buy that bus ticket, since it’s cheaper than a flight, but it costs more now. Maybe you should see how much the train costs.

Hold up. Let’s dissect what just happened...like an economist. You looked up the price of a bus ticket, and decided it was the best option at the time. But you didn’t buy (for shame, for shame!). Later, you expected the bus ticket price to be the same, but it wasn’t. It went up. This got you thinking about alternatives...substitute goods, if you will.

This is price sensitivity at work. Price sensitivity is how consumers change their behavior in accordance with price changes. Prices go up, and demand goes down...everyone runs away. Too expensive, they say. Prices go down, and everyone flocks...too much demand and not enough supply makes for a dangerous shopping experience. In these cases, there is high price sensitivity.

But it’s not always like that. Sometimes, the price for something will go up, and there will be the same demand, regardless. Economists measure price sensitivity with the price elasticity of demand. A high elasticity means a high price sensitivity; “inelastic” means people aren’t responsive (i.e. sensitive) to changes in prices.

What would you keep buying even if the price went up?

Related or Semi-related Video

Econ: What are Elasticities of Supply an...7 Views

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and finance Allah shmoop What are elasticity Sze of supply

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and demand All right people when we're talking elasticity and

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economics were talking about how responsive one thing is to

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something else Like what if your brother snapped your arm

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with rubber band Yeah if you reacted wildly While you're

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very responsive to the change which means your elastic to

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being rubber band snapped if you remain stoic as a

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monk unmoving and un reactive you're in the elastic to

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being rubber band snapped with the elasticity of supply and

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demand were measuring the change in quantity as a response

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to a change in price Will the price elasticity of

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demand asks if price changes by n percent How does

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the quantity demanded change in the technical sense Price elasticity

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of demand is the percent change in quantity demanded divided

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by the percent change in price OK well even in

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the Monkey Kingdom we can measure the elasticity of demand

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For instance there was a time when a monkey could

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buy one banana for three back scratches a high price

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But now a monkey can get one banana for the

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price of one back scratch much much cheaper than before

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in fact well it's a third the price since the

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price of bananas changed well How did the quantity of

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bananas demanded in the Monkey Kingdom change well since bananas

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or cheaper now than they were before And since monkeys

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loves me some bananas will The demand for bananas has

01:28

increased which means the demand for bananas moves down that

01:31

the band curve to a higher quantity and a lower

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price like write down here But how many more bananas

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were demanded Exactly The world wants to know if the

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quantity of bananas demanded didn't increase that much Even with

01:44

such a drastic price reduction well then the monkeys would

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have any elastic demand for bananas on the graph That's

01:50

when the price change looks a lot bigger than the

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quantity change like when price elasticity of demand is less

01:55

than one while the good is considered to have any

01:58

elastic demand If instead the monkeys went bananas for bananas

02:01

demanding many many many more bananas in response to the

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price drop well then it would be considered a relatively

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elastic demand when price elasticity of demand is greater than

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one Well then the goods considered to have elastic demand

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well if we think back to the elasticity of demand

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equation this makes sense like how much quantity changed is

02:19

on top and how much price changed is on the

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bottom right there When quantity changes more than price our

02:25

equation is top heavy which means it'LL be larger than

02:28

one when quantity changes less than price Well it goes

02:31

the other way right Okay when consumers will buy a

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lot more of something if the price drops or a

02:35

lot less of something when the price rises that good

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has elastic demand It's stretchy when consumers keep buying a

02:42

similar amount of the good Even if the price changes

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that good is in the elastic Let's take a look

02:47

at elasticity of supply from the banana supply Your perspective

02:51

The price elasticity of supply asks if price changes by

02:54

X percent How does the quantity supplied change Well the

02:58

price elasticity of supplies The percent change in quantity supply

03:01

divided by the percent change in price the higher the

03:04

price that banana suppliers can sell their bananas for well

03:07

the more bananas they'LL want to sell right The lower

03:09

the price the bananas with less They'LL want to sell

03:11

if we take our same case where banana prices decreased

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by two thirds were only a third of the original

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price Well how does that affect quantity of banana supplied

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First of all why would the price of bananas decreased

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Well if producers are priced takers it means their price

03:25

depends on consumer demand for the good In this case

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a drop in the demand for bananas by consumers would

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lead to a drop in prices So how does it

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drop in consumer demand Change the quantity supplied Well if

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the banana producer were elastic it means there's a large

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drop in banana supplied compared to the price drop Remember

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the more elastic something is the more drastic the response

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as with elasticity of demand a goods supplies considered elastic

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if the elasticity is bigger than one Well if banana

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producers were relatively in elastic to a drop in price

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than the quantity shrunk a small amount compared to the

04:01

price drop in elastic supply means the price elasticity of

04:04

the good is less than one Just as with any

04:07

elastic command Okay so you might be wondering why some

04:10

goods are more elastic imply Some are less elastic The

04:13

price elasticity of demand can change when prices change when

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income changes and when substitute goods are available right The

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effect of crisis and income changes are similar since they

04:25

both change your buying power in the market Right Substitute

04:30

goods are well a bit different say the price of

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bananas dropped by two thirds because the substitute good became

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available on the market Yes plantains were looking atyou Plantains

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are no bananas but they're similar enough to be cutting

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into the banana market when substitute goods cut into another

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goods market well that goods demand usually drops causing a

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price drop So for consumers it's a change in how

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much cash is in your pocket and your alternative options

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on the market So what about four suppliers Well the

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price elasticity of supplies largely dependent on their production constraints

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In other words how much control do suppliers have in

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raising supply Because well sometimes they don't too much For

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instance if there was a hurricane that wiped out a

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slice of the usual supply of bananas banana supply will

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be lower There's nothing suppliers can really do about it

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when supply can't be increased in response to an increase

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in demand Well the supply elasticity is in elastic Another

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good example of an elastic supply is parking there just

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some days when there's high demand for parking Yes supply

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does not rise to meet that demand You can't just

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get out your asphalt paving truck and throw down and

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new spots or a thousand new spots to accommodate that

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line of Tesla's forming at the garage entrance there Both

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of these cases are examples of limited production capacity Other

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factors that can affect the price elasticity of supply Well

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firm stockpiling whether it's easy for firms to switch up

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their production process and how long it takes firms to

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produce new goods There wouldn't be a banana shortage if

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we could get bananas to grow like bamboo But way

05:59

can't like Monkeys were sensitive to change price change That

06:03

is whether you're a consumer or a producer You have

06:05

immeasurable elasticity Deep down inside of you telling you how

06:09

to respond to price changes All you have to do

06:11

is put your banana down in Just listen for a

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second really

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