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Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.03,0:00:05.58,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:09.26,0:00:11.71,Default,,0000,0000,0000,,- [Alex] Today, we begin\Nto discuss elasticity
Dialogue: 0,0:00:11.71,0:00:13.53,Default,,0000,0000,0000,,and its applications.
Dialogue: 0,0:00:13.53,0:00:15.19,Default,,0000,0000,0000,,This is going to take us\Na few lectures
Dialogue: 0,0:00:15.19,0:00:17.44,Default,,0000,0000,0000,,because the material\Nis a little bit involved
Dialogue: 0,0:00:17.44,0:00:19.70,Default,,0000,0000,0000,,and also, I'm going to be honest,\Nthe material
Dialogue: 0,0:00:19.70,0:00:21.31,Default,,0000,0000,0000,,can be a little bit tedious.
Dialogue: 0,0:00:21.31,0:00:23.52,Default,,0000,0000,0000,,There's some formulas\Nthat we're going to have to learn
Dialogue: 0,0:00:23.52,0:00:26.18,Default,,0000,0000,0000,,how to use and memorize\Nand so forth.
Dialogue: 0,0:00:26.18,0:00:29.96,Default,,0000,0000,0000,,However, the applications\Nare really fascinating.
Dialogue: 0,0:00:29.98,0:00:33.58,Default,,0000,0000,0000,,Moreover, elasticity is going\Nto come back again and again.
Dialogue: 0,0:00:33.77,0:00:36.40,Default,,0000,0000,0000,,We're going to use it\Nwhen we do taxes and subsidies,
Dialogue: 0,0:00:36.40,0:00:39.25,Default,,0000,0000,0000,,we're going to use it again\Nwhen we do monopoly.
Dialogue: 0,0:00:39.25,0:00:42.54,Default,,0000,0000,0000,,This is just another one\Nof those foundational concepts
Dialogue: 0,0:00:42.54,0:00:46.21,Default,,0000,0000,0000,,that is going to pay to learn well\Nthe first time we do it.
Dialogue: 0,0:00:46.21,0:00:47.72,Default,,0000,0000,0000,,Let's get started.
Dialogue: 0,0:00:51.63,0:00:53.80,Default,,0000,0000,0000,,Demand curves slope down.
Dialogue: 0,0:00:53.80,0:00:55.72,Default,,0000,0000,0000,,In other words,\Nwhen the price goes up,
Dialogue: 0,0:00:55.72,0:00:58.77,Default,,0000,0000,0000,,the quantity demanded goes down,\Nwhen the price goes down,
Dialogue: 0,0:00:58.77,0:01:00.94,Default,,0000,0000,0000,,the quantity demanded goes up.
Dialogue: 0,0:01:00.94,0:01:02.38,Default,,0000,0000,0000,,Pretty simple.
Dialogue: 0,0:01:02.38,0:01:05.48,Default,,0000,0000,0000,,But how much does quantity\Ndemanded change
Dialogue: 0,0:01:05.48,0:01:07.37,Default,,0000,0000,0000,,when the price changes?
Dialogue: 0,0:01:07.37,0:01:10.19,Default,,0000,0000,0000,,When the price goes down,\Ndoes the quantity demanded
Dialogue: 0,0:01:10.19,0:01:13.26,Default,,0000,0000,0000,,increase by a lot or by a little?
Dialogue: 0,0:01:13.56,0:01:17.91,Default,,0000,0000,0000,,That's the concept that elasticity\Nis going to help us to understand.
Dialogue: 0,0:01:18.45,0:01:20.51,Default,,0000,0000,0000,,Here's the basic terminology.
Dialogue: 0,0:01:20.51,0:01:23.13,Default,,0000,0000,0000,,A demand curve is said\Nto be elastic
Dialogue: 0,0:01:23.13,0:01:28.00,Default,,0000,0000,0000,,when an increase in price reduces\Nthe quantity demanded by a lot.
Dialogue: 0,0:01:28.49,0:01:33.39,Default,,0000,0000,0000,,And similarly, when a decrease in price\Nincreases the quantity demanded
Dialogue: 0,0:01:33.39,0:01:36.67,Default,,0000,0000,0000,,by a lot -- that's an elastic curve.
Dialogue: 0,0:01:36.67,0:01:41.18,Default,,0000,0000,0000,,The quantity is changing a lot\Nin response to the price.
Dialogue: 0,0:01:41.82,0:01:45.33,Default,,0000,0000,0000,,When the same increase in price\Nreduces the quantity demanded
Dialogue: 0,0:01:45.33,0:01:49.74,Default,,0000,0000,0000,,just a little or when the same\Ndecrease in price increases
Dialogue: 0,0:01:49.74,0:01:52.30,Default,,0000,0000,0000,,the quantity demanded\Njust a little,
Dialogue: 0,0:01:52.30,0:01:54.90,Default,,0000,0000,0000,,then the demand curve\Nis said to be inelastic
Dialogue: 0,0:01:54.90,0:01:57.58,Default,,0000,0000,0000,,or less elastic or not elastic.
Dialogue: 0,0:01:58.02,0:02:01.27,Default,,0000,0000,0000,,The elasticity of demand\Nis going to be a measure
Dialogue: 0,0:02:01.27,0:02:05.02,Default,,0000,0000,0000,,of how responsive\Nthe quantity demanded is
Dialogue: 0,0:02:05.02,0:02:07.08,Default,,0000,0000,0000,,to a change in the price.
Dialogue: 0,0:02:07.59,0:02:09.00,Default,,0000,0000,0000,,Here's an example.
Dialogue: 0,0:02:09.00,0:02:12.05,Default,,0000,0000,0000,,Let's start with this demand curve\Nwhich we're going to see
Dialogue: 0,0:02:12.05,0:02:14.72,Default,,0000,0000,0000,,is an inelastic demand curve.
Dialogue: 0,0:02:15.37,0:02:19.47,Default,,0000,0000,0000,,Notice that when the price\Nincreases from $40 to $50
Dialogue: 0,0:02:19.47,0:02:22.77,Default,,0000,0000,0000,,that the quantity demanded\Ngoes down by just a little,
Dialogue: 0,0:02:22.77,0:02:27.26,Default,,0000,0000,0000,,by five units from 80 units\Nto 75 units.
Dialogue: 0,0:02:28.22,0:02:30.58,Default,,0000,0000,0000,,Now consider the following --\Nsuppose we had
Dialogue: 0,0:02:30.58,0:02:32.92,Default,,0000,0000,0000,,a demand curve like this.
Dialogue: 0,0:02:32.92,0:02:36.02,Default,,0000,0000,0000,,This turns out to be\Nan elastic demand curve.
Dialogue: 0,0:02:36.02,0:02:40.55,Default,,0000,0000,0000,,Notice that the same $10 increase\Nin price now reduces
Dialogue: 0,0:02:40.55,0:02:45.47,Default,,0000,0000,0000,,the quantity demanded\Nfrom 80 units to 20 units.
Dialogue: 0,0:02:45.47,0:02:49.46,Default,,0000,0000,0000,,On the elastic demand curve,\Nthe quantity demanded
Dialogue: 0,0:02:49.46,0:02:53.69,Default,,0000,0000,0000,,is much more responsive\Nto the price than it is
Dialogue: 0,0:02:53.69,0:02:56.67,Default,,0000,0000,0000,,on the inelastic demand curve.
Dialogue: 0,0:02:57.69,0:02:59.100,Default,,0000,0000,0000,,On a demand curve\Nwhere the quantity demanded
Dialogue: 0,0:02:59.100,0:03:04.39,Default,,0000,0000,0000,,is responsive to the price,\Nthat's called an elastic demand.
Dialogue: 0,0:03:04.78,0:03:07.01,Default,,0000,0000,0000,,On a demand curve\Nwhen the quantity demanded
Dialogue: 0,0:03:07.01,0:03:11.18,Default,,0000,0000,0000,,isn't responsive\Nor is less responsive to the price,
Dialogue: 0,0:03:11.18,0:03:15.46,Default,,0000,0000,0000,,that's an inelastic demand\Nor a more inelastic demand,
Dialogue: 0,0:03:15.46,0:03:17.52,Default,,0000,0000,0000,,a less elastic demand.
Dialogue: 0,0:03:17.77,0:03:20.09,Default,,0000,0000,0000,,Now you may have noticed\Non the previous diagrams
Dialogue: 0,0:03:20.09,0:03:23.38,Default,,0000,0000,0000,,that the inelastic curve\Nhad the higher slope.
Dialogue: 0,0:03:23.76,0:03:27.90,Default,,0000,0000,0000,,That is it was more vertical,\Nwhile the elastic curve
Dialogue: 0,0:03:27.90,0:03:30.52,Default,,0000,0000,0000,,was the more horizontal curve.
Dialogue: 0,0:03:30.72,0:03:33.61,Default,,0000,0000,0000,,We haven't defined elasticity\Ntechnically yet.
Dialogue: 0,0:03:34.02,0:03:37.06,Default,,0000,0000,0000,,When we do so, you'll be able\Nto see that elasticity
Dialogue: 0,0:03:37.06,0:03:39.82,Default,,0000,0000,0000,,is not the same as slope.
Dialogue: 0,0:03:40.17,0:03:41.71,Default,,0000,0000,0000,,However, they are related.
Dialogue: 0,0:03:42.60,0:03:45.98,Default,,0000,0000,0000,,For the purposes of this class,\Nif you follow a simple rule,
Dialogue: 0,0:03:45.98,0:03:47.44,Default,,0000,0000,0000,,you're going to be fine.
Dialogue: 0,0:03:47.44,0:03:51.06,Default,,0000,0000,0000,,The rule is this --\Nif two linear demand
Dialogue: 0,0:03:51.06,0:03:54.69,Default,,0000,0000,0000,,or supply curves run through\Na common point,
Dialogue: 0,0:03:54.69,0:03:58.61,Default,,0000,0000,0000,,then at any given quantity,\Nthe curve that is flatter,
Dialogue: 0,0:03:58.61,0:04:02.51,Default,,0000,0000,0000,,more horizontal,\Nthat's the more elastic curve.
Dialogue: 0,0:04:02.51,0:04:04.80,Default,,0000,0000,0000,,So if you're going to draw\Ntwo demand curves
Dialogue: 0,0:04:04.80,0:04:07.39,Default,,0000,0000,0000,,which we're going to have\Nto do many times in this class.
Dialogue: 0,0:04:07.39,0:04:09.96,Default,,0000,0000,0000,,Let's say they run\Nthrough a common point.
Dialogue: 0,0:04:09.96,0:04:13.09,Default,,0000,0000,0000,,The flatter one is\Nthe more elastic curve,
Dialogue: 0,0:04:13.09,0:04:14.80,Default,,0000,0000,0000,,that will work fine for you.
Dialogue: 0,0:04:14.80,0:04:16.74,Default,,0000,0000,0000,,What determines\Nwhether a demand curve
Dialogue: 0,0:04:16.74,0:04:19.08,Default,,0000,0000,0000,,is more or less elastic?
Dialogue: 0,0:04:19.57,0:04:22.00,Default,,0000,0000,0000,,The key determinant\Nis the availability
Dialogue: 0,0:04:22.00,0:04:23.57,Default,,0000,0000,0000,,of substitutes.
Dialogue: 0,0:04:23.64,0:04:26.15,Default,,0000,0000,0000,,As we'll see in a minute,\Nthe more substitutes,
Dialogue: 0,0:04:26.15,0:04:28.35,Default,,0000,0000,0000,,the more elastic the curve.
Dialogue: 0,0:04:28.37,0:04:30.85,Default,,0000,0000,0000,,We can also give\Nsome more specific examples
Dialogue: 0,0:04:30.85,0:04:33.82,Default,,0000,0000,0000,,that are closely related\Nto the number of substitutes.
Dialogue: 0,0:04:34.34,0:04:37.64,Default,,0000,0000,0000,,The time horizon --\Na longer time horizon
Dialogue: 0,0:04:37.64,0:04:40.20,Default,,0000,0000,0000,,is going to make the curve\Nmore elastic.
Dialogue: 0,0:04:40.76,0:04:43.96,Default,,0000,0000,0000,,The category of product,\Na broad category
Dialogue: 0,0:04:43.96,0:04:46.02,Default,,0000,0000,0000,,is going to be less elastic.
Dialogue: 0,0:04:46.02,0:04:49.00,Default,,0000,0000,0000,,A specific category, more elastic.
Dialogue: 0,0:04:49.30,0:04:51.20,Default,,0000,0000,0000,,Necessities versus luxuries.\N
Dialogue: 0,0:04:51.58,0:04:54.02,Default,,0000,0000,0000,,Luxuries are going\Nto be more elastic.
Dialogue: 0,0:04:54.23,0:04:56.87,Default,,0000,0000,0000,,The purchase size -- \Nbigger purchase sizes
Dialogue: 0,0:04:56.87,0:04:59.64,Default,,0000,0000,0000,,are going to be more elastic.
Dialogue: 0,0:05:00.04,0:05:02.38,Default,,0000,0000,0000,,Now I've gone through those quickly\Nso don't worry
Dialogue: 0,0:05:02.38,0:05:04.36,Default,,0000,0000,0000,,if you haven't followed them\Nall right away.
Dialogue: 0,0:05:04.53,0:05:07.28,Default,,0000,0000,0000,,I'm going to go through them,\Nnow, each in turn
Dialogue: 0,0:05:07.28,0:05:08.96,Default,,0000,0000,0000,,and explain the details.
Dialogue: 0,0:05:08.96,0:05:12.37,Default,,0000,0000,0000,,The availability of substitutes\Nis really the key determinant
Dialogue: 0,0:05:12.37,0:05:14.93,Default,,0000,0000,0000,,of how elastic a demand curve is.
Dialogue: 0,0:05:14.93,0:05:16.80,Default,,0000,0000,0000,,The idea is pretty intuitive.
Dialogue: 0,0:05:16.80,0:05:19.30,Default,,0000,0000,0000,,If there's lots of substitutes\Nfor a good,
Dialogue: 0,0:05:19.30,0:05:21.97,Default,,0000,0000,0000,,then when the price\Nof that good goes up,
Dialogue: 0,0:05:21.97,0:05:25.60,Default,,0000,0000,0000,,people are going to switch from it,\Nthe good whose price is increased,
Dialogue: 0,0:05:25.60,0:05:27.70,Default,,0000,0000,0000,,towards the substitutes.
Dialogue: 0,0:05:27.70,0:05:29.62,Default,,0000,0000,0000,,They're going to buy\Nthe substitutes instead.
Dialogue: 0,0:05:30.43,0:05:32.84,Default,,0000,0000,0000,,That means that when a good\Nwith lots of substitutes,
Dialogue: 0,0:05:32.84,0:05:35.03,Default,,0000,0000,0000,,when the price\Nof that good goes up,
Dialogue: 0,0:05:35.03,0:05:38.43,Default,,0000,0000,0000,,the quantity demanded\Nis going to go down a lot
Dialogue: 0,0:05:38.43,0:05:41.01,Default,,0000,0000,0000,,as people switch\Nto the substitutes.
Dialogue: 0,0:05:41.52,0:05:43.24,Default,,0000,0000,0000,,On the other hand,\Nif we have a good
Dialogue: 0,0:05:43.24,0:05:45.50,Default,,0000,0000,0000,,which has very few substitutes,
Dialogue: 0,0:05:45.50,0:05:48.65,Default,,0000,0000,0000,,then consumers are going\Nto find it harder to adjust
Dialogue: 0,0:05:48.65,0:05:50.55,Default,,0000,0000,0000,,when the price has changed.
Dialogue: 0,0:05:50.55,0:05:54.86,Default,,0000,0000,0000,,In particular, if the price goes up\Nand there are very few substitutes,
Dialogue: 0,0:05:54.86,0:05:56.84,Default,,0000,0000,0000,,consumers aren't going\Nto be able to switch
Dialogue: 0,0:05:56.84,0:06:00.39,Default,,0000,0000,0000,,out of that good\Ninto another good.
Dialogue: 0,0:06:00.39,0:06:03.97,Default,,0000,0000,0000,,So the quantity demanded\Nis going to remain fairly constant.
Dialogue: 0,0:06:04.00,0:06:07.98,Default,,0000,0000,0000,,It's not going to fall a lot\Nwhen the good has few substitutes.
Dialogue: 0,0:06:08.47,0:06:10.93,Default,,0000,0000,0000,,Let's test your understanding\Nwith some quick examples.
Dialogue: 0,0:06:11.46,0:06:15.47,Default,,0000,0000,0000,,Oil, Brazilian coffee, insulin,\NBayer Aspirin.
Dialogue: 0,0:06:16.00,0:06:18.65,Default,,0000,0000,0000,,Which of these goods\Nhave an elastic demand?
Dialogue: 0,0:06:18.65,0:06:21.26,Default,,0000,0000,0000,,Which of them have\Nan inelastic demand?
Dialogue: 0,0:06:21.76,0:06:23.43,Default,,0000,0000,0000,,Let's start with oil.
Dialogue: 0,0:06:23.43,0:06:26.94,Default,,0000,0000,0000,,Are there lots of substitutes\Nfor oil or just a few substitutes?
Dialogue: 0,0:06:27.64,0:06:29.50,Default,,0000,0000,0000,,Just a few substitutes, right?
Dialogue: 0,0:06:29.91,0:06:33.33,Default,,0000,0000,0000,,So if the price of oil\Ngoes up tomorrow,
Dialogue: 0,0:06:33.33,0:06:36.61,Default,,0000,0000,0000,,at that point do we all stop\Ndriving our cars?
Dialogue: 0,0:06:36.61,0:06:39.27,Default,,0000,0000,0000,,No, there aren't\Nvery many substitutes,
Dialogue: 0,0:06:39.27,0:06:40.90,Default,,0000,0000,0000,,at least in the short run.
Dialogue: 0,0:06:40.90,0:06:44.83,Default,,0000,0000,0000,,Few substitutes that means\Ninelastic demand for oil.
Dialogue: 0,0:06:45.43,0:06:47.47,Default,,0000,0000,0000,,What about Brazilian coffee?
Dialogue: 0,0:06:47.47,0:06:51.81,Default,,0000,0000,0000,,Some people love Brazilian coffee\Nbut there's also Ethiopian coffee,
Dialogue: 0,0:06:51.81,0:06:54.47,Default,,0000,0000,0000,,there's Mexican coffee,\Nthere's Guatemalan coffee.
Dialogue: 0,0:06:54.47,0:06:58.74,Default,,0000,0000,0000,,Therefore, lots of substitutes,\Ntherefore elastic demand.
Dialogue: 0,0:06:59.12,0:07:02.31,Default,,0000,0000,0000,,Insulin, if you don't get it\Nyou're going to die.
Dialogue: 0,0:07:02.61,0:07:06.49,Default,,0000,0000,0000,,Not many substitutes,\Ntherefore inelastic demand.
Dialogue: 0,0:07:06.98,0:07:08.99,Default,,0000,0000,0000,,What about Bayer Aspirin?
Dialogue: 0,0:07:08.99,0:07:11.26,Default,,0000,0000,0000,,If you go to Wal-Mart,\Nyou'll find Wal-Mart Aspirin.
Dialogue: 0,0:07:11.26,0:07:13.00,Default,,0000,0000,0000,,If you go to Target,\Nthere's Target Aspirin.
Dialogue: 0,0:07:13.00,0:07:15.30,Default,,0000,0000,0000,,All kinds of generic aspirins.
Dialogue: 0,0:07:15.30,0:07:18.29,Default,,0000,0000,0000,,If you understand\Nthat aspirin is aspirin,
Dialogue: 0,0:07:18.29,0:07:20.72,Default,,0000,0000,0000,,you'll understand that there\Nare lots of substitutes.
Dialogue: 0,0:07:21.28,0:07:25.67,Default,,0000,0000,0000,,If Bayer tries to raise the price\Nof its aspirin too much,
Dialogue: 0,0:07:25.67,0:07:28.99,Default,,0000,0000,0000,,you'll say, "Forget it. I'm going\Nto go buy the substitutes."
Dialogue: 0,0:07:28.99,0:07:31.80,Default,,0000,0000,0000,,Therefore, elastic demand.
Dialogue: 0,0:07:31.80,0:07:35.06,Default,,0000,0000,0000,,The time horizon influences\Nthe elasticity of demand
Dialogue: 0,0:07:35.06,0:07:36.35,Default,,0000,0000,0000,,for a good.
Dialogue: 0,0:07:36.35,0:07:38.66,Default,,0000,0000,0000,,And really this is just\Nan application of the fact
Dialogue: 0,0:07:38.66,0:07:41.70,Default,,0000,0000,0000,,that the fundamental determinant\Nis substitutes.
Dialogue: 0,0:07:41.70,0:07:43.97,Default,,0000,0000,0000,,Immediately following\Na price increase,
Dialogue: 0,0:07:43.97,0:07:46.81,Default,,0000,0000,0000,,it's going to be difficult\Nto find substitutes.
Dialogue: 0,0:07:47.42,0:07:51.41,Default,,0000,0000,0000,,Therefore, immediately following\Na price increase, demand is likely
Dialogue: 0,0:07:51.41,0:07:55.67,Default,,0000,0000,0000,,to be fairly inelastic,\Nbut over time consumers
Dialogue: 0,0:07:55.67,0:07:59.100,Default,,0000,0000,0000,,can adjust their behavior\Nand they can find more substitutes.
Dialogue: 0,0:08:00.74,0:08:03.79,Default,,0000,0000,0000,,For example, if the price of oil\Ngoes up, then we know
Dialogue: 0,0:08:03.79,0:08:06.80,Default,,0000,0000,0000,,that there are very few substitutes\Nin the short run.
Dialogue: 0,0:08:06.80,0:08:09.32,Default,,0000,0000,0000,,But in the long run,\Nwhat are some of the things
Dialogue: 0,0:08:09.32,0:08:11.31,Default,,0000,0000,0000,,that people would do\Nif the price of oil
Dialogue: 0,0:08:11.31,0:08:13.70,Default,,0000,0000,0000,,stays permanently higher?
Dialogue: 0,0:08:13.70,0:08:17.66,Default,,0000,0000,0000,,We'll drive smaller cars.\NThey'll switch to mopeds.
Dialogue: 0,0:08:17.66,0:08:20.68,Default,,0000,0000,0000,,There's a lot more mopeds\Ndriven in Europe, for example,
Dialogue: 0,0:08:20.68,0:08:22.63,Default,,0000,0000,0000,,because for decades,\Nthe price of oil
Dialogue: 0,0:08:22.63,0:08:26.08,Default,,0000,0000,0000,,has been higher in Europe\Ndue to taxes.
Dialogue: 0,0:08:26.08,0:08:28.66,Default,,0000,0000,0000,,People have adjusted.
Dialogue: 0,0:08:28.66,0:08:31.20,Default,,0000,0000,0000,,In the long run,\Npeople will even adjust
Dialogue: 0,0:08:31.20,0:08:34.17,Default,,0000,0000,0000,,how cities are designed\Nso that more people
Dialogue: 0,0:08:34.17,0:08:37.00,Default,,0000,0000,0000,,will live in apartments\Ncloser to where they work
Dialogue: 0,0:08:37.00,0:08:39.12,Default,,0000,0000,0000,,if the price of oil stays high.
Dialogue: 0,0:08:39.62,0:08:43.23,Default,,0000,0000,0000,,If the price of oil is really low,\Nthere'll be more sprawl.
Dialogue: 0,0:08:43.52,0:08:45.91,Default,,0000,0000,0000,,People will be more willing\Nto live far away
Dialogue: 0,0:08:45.91,0:08:49.12,Default,,0000,0000,0000,,and have a big lawn\Nif the price of oil isn't so high.
Dialogue: 0,0:08:50.03,0:08:54.23,Default,,0000,0000,0000,,The longer the time horizon,\Nthe more the ability to adjust,
Dialogue: 0,0:08:54.28,0:08:58.56,Default,,0000,0000,0000,,the more substitutes, and thus,\Nthe more elastic the demand.
Dialogue: 0,0:08:58.97,0:09:02.72,Default,,0000,0000,0000,,Another factor determining\Nthe elasticity of demand, again,
Dialogue: 0,0:09:02.72,0:09:04.58,Default,,0000,0000,0000,,based upon\Nthe fundamental question:
Dialogue: 0,0:09:04.58,0:09:07.33,Default,,0000,0000,0000,,are there lots of substitutes\Nor just a few
Dialogue: 0,0:09:07.33,0:09:10.50,Default,,0000,0000,0000,,is what we might call\Nthe classification of the good.
Dialogue: 0,0:09:10.52,0:09:14.03,Default,,0000,0000,0000,,The broader the classification,\Nthe less likely consumers
Dialogue: 0,0:09:14.03,0:09:16.44,Default,,0000,0000,0000,,will be able to find a substitute.
Dialogue: 0,0:09:16.44,0:09:19.86,Default,,0000,0000,0000,,The narrower the classification,\Nthe more likely consumers
Dialogue: 0,0:09:19.86,0:09:22.14,Default,,0000,0000,0000,,will be able to find a substitute.
Dialogue: 0,0:09:22.14,0:09:24.30,Default,,0000,0000,0000,,We've already seen\Nan example of this.
Dialogue: 0,0:09:24.30,0:09:26.93,Default,,0000,0000,0000,,There are more substitutes\Nfor Bayer Aspirin,
Dialogue: 0,0:09:26.93,0:09:30.55,Default,,0000,0000,0000,,a narrow classification,\Nthan there are for aspirin,
Dialogue: 0,0:09:30.55,0:09:32.90,Default,,0000,0000,0000,,a wider classification.
Dialogue: 0,0:09:32.90,0:09:35.46,Default,,0000,0000,0000,,If the price\Nof Bayer Aspirin goes up,
Dialogue: 0,0:09:35.46,0:09:37.92,Default,,0000,0000,0000,,there are more substitutes --\Nthe generics.
Dialogue: 0,0:09:37.92,0:09:40.76,Default,,0000,0000,0000,,If the price\Nof all aspirin goes up,
Dialogue: 0,0:09:40.76,0:09:42.97,Default,,0000,0000,0000,,there are fewer substitutes.
Dialogue: 0,0:09:42.97,0:09:45.51,Default,,0000,0000,0000,,Of course, there are still some,\Nlike ibuprofen
Dialogue: 0,0:09:45.51,0:09:47.83,Default,,0000,0000,0000,,and acetaminophen and so forth.
Dialogue: 0,0:09:47.83,0:09:50.39,Default,,0000,0000,0000,,But the narrower\Nthe classification,
Dialogue: 0,0:09:50.39,0:09:54.04,Default,,0000,0000,0000,,the more substitutes,\Nthe more elastic the demand.
Dialogue: 0,0:09:54.06,0:09:56.74,Default,,0000,0000,0000,,Another example,\Nthe demand for food.
Dialogue: 0,0:09:56.74,0:10:00.16,Default,,0000,0000,0000,,A broad classification\Nis less elastic
Dialogue: 0,0:10:00.16,0:10:03.74,Default,,0000,0000,0000,,than the demand for lettuce,\Na particular type of food,
Dialogue: 0,0:10:03.74,0:10:06.00,Default,,0000,0000,0000,,a narrow classification.
Dialogue: 0,0:10:06.00,0:10:09.69,Default,,0000,0000,0000,,Therefore the demand\Nfor lettuce would be more elastic
Dialogue: 0,0:10:09.69,0:10:11.70,Default,,0000,0000,0000,,than the demand for food.
Dialogue: 0,0:10:11.70,0:10:14.22,Default,,0000,0000,0000,,The nature of the good\Nin the consumer's mind
Dialogue: 0,0:10:14.22,0:10:16.24,Default,,0000,0000,0000,,can also affect the elasticity.
Dialogue: 0,0:10:16.24,0:10:19.54,Default,,0000,0000,0000,,In particular, whether the good\Nis thought of as a necessity
Dialogue: 0,0:10:19.54,0:10:21.48,Default,,0000,0000,0000,,or as a luxury.
Dialogue: 0,0:10:21.48,0:10:24.33,Default,,0000,0000,0000,,Now don't take these categories\Nas somehow being out there
Dialogue: 0,0:10:24.33,0:10:25.61,Default,,0000,0000,0000,,in the world.
Dialogue: 0,0:10:25.61,0:10:27.62,Default,,0000,0000,0000,,They are more\Nabout a person's tastes.
Dialogue: 0,0:10:27.62,0:10:30.29,Default,,0000,0000,0000,,For example, for some consumers\Nthat coffee in the morning
Dialogue: 0,0:10:30.29,0:10:32.01,Default,,0000,0000,0000,,is a necessity.
Dialogue: 0,0:10:32.01,0:10:34.93,Default,,0000,0000,0000,,Even if the price of coffee\Ngoes up by a lot,
Dialogue: 0,0:10:34.93,0:10:38.00,Default,,0000,0000,0000,,those consumers\Nwill still continue to consume
Dialogue: 0,0:10:38.00,0:10:40.34,Default,,0000,0000,0000,,about the same amount of coffee.
Dialogue: 0,0:10:40.34,0:10:43.69,Default,,0000,0000,0000,,Therefore, those consumers\Nwill have an inelastic demand.
Dialogue: 0,0:10:43.69,0:10:47.14,Default,,0000,0000,0000,,They'll have an inelastic demand\Nfor goods that they consider
Dialogue: 0,0:10:47.14,0:10:49.06,Default,,0000,0000,0000,,to be necessities.
Dialogue: 0,0:10:49.46,0:10:51.26,Default,,0000,0000,0000,,The same good\Nin someone else's mind
Dialogue: 0,0:10:51.26,0:10:52.54,Default,,0000,0000,0000,,might be a luxury.
Dialogue: 0,0:10:52.54,0:10:55.29,Default,,0000,0000,0000,,The consumer who occasionally\Nhas a cup of coffee.
Dialogue: 0,0:10:55.29,0:10:56.52,Default,,0000,0000,0000,,If the price goes up,
Dialogue: 0,0:10:56.52,0:10:58.34,Default,,0000,0000,0000,,then they're going\Nto be more willing to say,
Dialogue: 0,0:10:58.34,0:11:00.74,Default,,0000,0000,0000,,"Nah, I'm going to switch to tea.\NI'm going to switch
Dialogue: 0,0:11:00.74,0:11:02.29,Default,,0000,0000,0000,,to something else."
Dialogue: 0,0:11:02.29,0:11:05.93,Default,,0000,0000,0000,,Depending upon how consumers\Nregard the good therefore
Dialogue: 0,0:11:05.93,0:11:09.30,Default,,0000,0000,0000,,as a necessity,\Nmore inelastic demand.
Dialogue: 0,0:11:09.30,0:11:12.73,Default,,0000,0000,0000,,As a luxury, more elastic demand.
Dialogue: 0,0:11:12.73,0:11:15.66,Default,,0000,0000,0000,,The final determinant\Nis the size of the purchase
Dialogue: 0,0:11:15.66,0:11:18.11,Default,,0000,0000,0000,,relative to a consumer's budget.
Dialogue: 0,0:11:18.11,0:11:20.86,Default,,0000,0000,0000,,If the purchase is small relative\Nto the budget,
Dialogue: 0,0:11:20.86,0:11:24.02,Default,,0000,0000,0000,,then consumers may not even notice\Nwhen the price goes up.
Dialogue: 0,0:11:24.02,0:11:26.58,Default,,0000,0000,0000,,And if they don't notice,\Nthey're not going to respond
Dialogue: 0,0:11:26.58,0:11:29.36,Default,,0000,0000,0000,,with a big change\Nin the quantity demanded.
Dialogue: 0,0:11:29.36,0:11:31.26,Default,,0000,0000,0000,,On the other hand,\Nif we have a product
Dialogue: 0,0:11:31.26,0:11:33.46,Default,,0000,0000,0000,,which is a large part\Nof the budget,
Dialogue: 0,0:11:33.46,0:11:35.24,Default,,0000,0000,0000,,consumers will notice.
Dialogue: 0,0:11:35.24,0:11:38.44,Default,,0000,0000,0000,,Consumers notice when the price\Nof automobiles goes up --
Dialogue: 0,0:11:38.44,0:11:40.30,Default,,0000,0000,0000,,that's a big purchase.
Dialogue: 0,0:11:40.30,0:11:42.42,Default,,0000,0000,0000,,They're going to shop around a lot.
Dialogue: 0,0:11:42.42,0:11:44.71,Default,,0000,0000,0000,,They're going to try\Nand get a big bargain
Dialogue: 0,0:11:44.71,0:11:46.68,Default,,0000,0000,0000,,when the purchase\Nis a large fraction
Dialogue: 0,0:11:46.68,0:11:48.45,Default,,0000,0000,0000,,of their budget.
Dialogue: 0,0:11:48.45,0:11:51.02,Default,,0000,0000,0000,,On the other hand,\Nwhen the price of toothpicks
Dialogue: 0,0:11:51.02,0:11:53.98,Default,,0000,0000,0000,,goes up by a lot,\Nthat's not such a big deal.
Dialogue: 0,0:11:53.98,0:11:56.37,Default,,0000,0000,0000,,Consumers probably\Nwon't even notice
Dialogue: 0,0:11:56.37,0:11:58.98,Default,,0000,0000,0000,,whether toothpicks\Nare $0.50 or a $1.
Dialogue: 0,0:11:58.98,0:12:01.70,Default,,0000,0000,0000,,That's a 50% increase in price,
Dialogue: 0,0:12:01.70,0:12:04.85,Default,,0000,0000,0000,,but you probably don't even notice\Nthat at the store.
Dialogue: 0,0:12:05.22,0:12:10.16,Default,,0000,0000,0000,,So small item at least\Nin the short run more inelastic.
Dialogue: 0,0:12:10.54,0:12:12.80,Default,,0000,0000,0000,,Bigger items, the bigger part\Nof the budget,
Dialogue: 0,0:12:12.80,0:12:18.41,Default,,0000,0000,0000,,ones the consumer notices,\Nmore elastic, more price sensitive.
Dialogue: 0,0:12:18.99,0:12:22.76,Default,,0000,0000,0000,,Let's summarize the determinants\Nof the elasticity of demand.
Dialogue: 0,0:12:22.97,0:12:26.02,Default,,0000,0000,0000,,For less elastic goods,\Nthat means fewer substitutes.
Dialogue: 0,0:12:26.25,0:12:29.65,Default,,0000,0000,0000,,Short run, less time to adjust,\Nnecessities,
Dialogue: 0,0:12:29.65,0:12:31.49,Default,,0000,0000,0000,,small part of the budget.
Dialogue: 0,0:12:31.77,0:12:35.14,Default,,0000,0000,0000,,Each of these factors makes\Nthe demand curve less elastic.
Dialogue: 0,0:12:36.68,0:12:39.98,Default,,0000,0000,0000,,More elastic demand,\Nthat means more substitutes.
Dialogue: 0,0:12:39.98,0:12:45.32,Default,,0000,0000,0000,,Long run, more time to adjust.\NLuxuries, large part of the budget.
Dialogue: 0,0:12:45.32,0:12:48.56,Default,,0000,0000,0000,,These factors make\Na demand curve more elastic.
Dialogue: 0,0:12:48.92,0:12:52.74,Default,,0000,0000,0000,,If you have to, memorize these,\Nbut once you understand
Dialogue: 0,0:12:52.74,0:12:55.27,Default,,0000,0000,0000,,that elasticity means\Nhow responsive
Dialogue: 0,0:12:55.27,0:12:58.74,Default,,0000,0000,0000,,is the quantity demanded\Nto a change in the price,
Dialogue: 0,0:12:58.74,0:13:03.35,Default,,0000,0000,0000,,then you'll be able to recreate\Nor figure out these factors again.
Dialogue: 0,0:13:04.48,0:13:06.71,Default,,0000,0000,0000,,That's it for the elasticity\Nof demand.
Dialogue: 0,0:13:06.71,0:13:09.95,Default,,0000,0000,0000,,Next time,we're going to take\Na closer look at technically
Dialogue: 0,0:13:09.95,0:13:11.60,Default,,0000,0000,0000,,how do we get a number?
Dialogue: 0,0:13:11.60,0:13:14.16,Default,,0000,0000,0000,,How do we calculate\Nthe elasticity of demand?
Dialogue: 0,0:13:14.16,0:13:17.71,Default,,0000,0000,0000,,Given some facts and figures\Non prices and quantity demanded,
Dialogue: 0,0:13:17.71,0:13:20.70,Default,,0000,0000,0000,,how do we calculate\Nwhat the elasticity really is?
Dialogue: 0,0:13:20.70,0:13:22.47,Default,,0000,0000,0000,,What's the number?
Dialogue: 0,0:13:23.63,0:13:25.32,Default,,0000,0000,0000,,- [Narrator] If you want\Nto test yourself,
Dialogue: 0,0:13:25.32,0:13:27.61,Default,,0000,0000,0000,,click Practice questions.
Dialogue: 0,0:13:27.61,0:13:30.97,Default,,0000,0000,0000,,Or if you're ready to move on,\Njust click Next Video.
Dialogue: 0,0:13:30.97,0:13:35.98,Default,,0000,0000,0000,,♪ [music] ♪