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And finance Allah Shmoop what is elasticity Socks underwear rubber

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bands slingshots Olympic gymnasts What do these things have in

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

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

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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

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

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and you die People will pay you almost anything to

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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

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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

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down by the side of the road in Death Valley

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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

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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

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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

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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

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his backyard So a lot goes into price elasticity Unfortunately

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economists have an equation for all this stuff to figure

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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

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in this little graph equation here then that product is

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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

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If you run the last two city equation and get

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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

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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

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mean Twitter comments about gas state Asian owner but ultimately

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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

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

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there are big moves in price while you find a

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

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as flexible in that regard as that gymnast I do

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