Elasticity of Demand- Micro Topic 2.3

Main ideas & concepts taught

• Law of Demand (baseline)

  • There is an inverse relationship between price and quantity demanded:
    • If price goes up → people buy less
    • If price goes down → people buy more
  • The remaining question is how much quantity changes when price changes.

• Elasticity of Demand

  • Elasticity measures sensitivity: how responsive quantity demanded is to a change in price.
  • It depends on the type of product, especially:
    • How many substitutes the product has
    • Whether the product is a necessity or a luxury

Types of demand elasticity (meaning + examples)

1. Inelastic demand

   • When price increases → quantity demanded decreases, but only a little
   • When price decreases → quantity demanded increases, but only a little
   • Cause: typically few substitutes and/or necessity
   • Gasoline example
     • Few substitutes (you can’t easily replace it)
     • Also described as a necessity
   • Elasticity coefficient: less than 1 (in absolute value terms)

2. Elastic demand

   • When price increases → quantity demanded decreases a lot
   • When price decreases → quantity demanded increases a lot
   • Cause: typically many substitutes and/or luxuries
   • Elasticity coefficient: greater than 1

3. Unit elastic demand

   • Quantity changes by the same percentage as price
   • Example rule: if price goes up 20%, quantity goes down 20%
   • Elasticity coefficient: equals 1

4. Perfectly inelastic demand

   • Quantity does not change when price changes
   • Percent change in quantity = 0
   • Elasticity coefficient: 0
   • Graph description: vertical demand curve

5. Perfectly elastic demand

   • A firm cannot meaningfully raise/lower price because buyers would stop buying if price differs
   • Graph description: horizontal demand curve
   • Elasticity coefficient: infinite

Elasticity coefficient (briefly stated)

• Elasticity of demand coefficient = (percent change in quantity) / (percent change in price)

• Interpretation rule (using absolute value):

  • < 1 → inelastic
  • = 1 → unit elastic
  • > 1 → elastic

The speaker notes not to panic when hearing “coefficient,” and emphasizes there’s only “a little bit of math.”

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Detailed bullet list: Total Revenue Test (methodology)

• What total revenue means

  • Total revenue = price × quantity
  • On the graphs, total revenue is shown as a rectangle/box, where the area represents price times quantity.

• Setup mentioned

  • When supply shifts left (as described), price rises and quantity falls (law of demand).
  • The key question becomes whether the total revenue box grows or shrinks.

• Rules

  • If demand is inelastic

    • Price increases a lot
    • Quantity decreases only a little
    • Result: Total revenue increases
    • Equivalent direction stated:
      • If price goes down, total revenue goes down

  • If demand is elastic

    • Price increases a lot, quantity decreases a lot
    • Result: Total revenue decreases
    • Equivalent direction stated:
      • If price goes down, total revenue increases

• Test-question logic (explicit)

  • If a problem says:
    • Price goes up and total revenue goes down
  • Then:
    • Demand must be elastic

• “Hands” mnemonic (given by the speaker)

  • The speaker uses an “I” shape to represent inelastic behavior:
    • Price goes up & total revenue goes up → “I” → inelastic demand
    • Price goes down & total revenue goes down → “I” → inelastic demand
    • Price goes up & total revenue goes down → not an “I” → elastic demand
    • Price goes down & total revenue goes up → not an “I” → elastic demand

How to use it on tests: check the signs of (price change) and (total revenue change) to decide elastic vs. inelastic.

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Speakers / sources featured

• Tammie Ng Lin Ern (credited in subtitles as “ENG CC By: Tammie Ng Lin Ern”)