Alright guys, I hope you're excited for this video. This is where I took everything we've learned so far and I put it all onto one page and we just got a ton of information all crammed in here, so let's check it out. So here we go. I've got it nice and organized for you. We're going to start with our price elasticities of demand and supply. So we got our titles there and then I've got your formulas right next to it. Right? I've got those super shorthand. I think you should feel comfortable with reading that by now. We've got percentage change in quantity demanded divided by percentage change in price there, right? So, that's going to be your formula that you should use and then I've got all the different ways you can end up with an answer, right. You're going to be able to analyze your answers based on this column. You're going to get an answer above 1. Boom. You know it's elastic. You can't forget it there. And here I made a note, absolute value. Right? So for both of these, price elasticity of demand and price elasticity of supply, it's always going to be positive numbers, right? Always positive numbers, we use the absolute value, don't worry about negative and positive. And here on the right, I've got the steps that we've been using, right? That step-by-step process to subtract, to add, and remember these steps worked for all of our elasticities that we've worked on so far. The only thing you had to note was what were our 2 variables, right? For price elasticity of demand and supply, we had quantities and price, right? Quantity demanded or quantity supplied and price on the denominator. Same steps, right? Income, right. So that's why I've kind of italicized these is just because those are our 2 variables. I left it as the one for elasticity of demand just because it's the most common one, but you should be comfortable substituting that for income or across price, right? Whatever it is, just use your two variables from the problem. So there you have your price elasticity of demand and supply so you can kind of see how related they are, and then down here we've got our income elasticity of demand and our cross price elasticity of demand, right? The other 2 that we did and they've got some similarities too. So first, just like before I gave you your formulas, percentage change in quantity demanded over percentage change in income or for cross price, percentage change in quantity demanded of good X, right, the first good divided by the percentage change in price of the other good. And then in the next box, I've got how we're going to analyze these, right. When you get your answer, your elasticity, this is how you're going to analyze whether it's a normal good or a substitute complement, whatever we're working with. We've got it all there and I made a quick note here, right, for these 2, the sign does matter. We got to keep the positive or the negative so we're going to have to pay attention to that and that's why I've got the step 6 here. This is where after we've solved our subtraction, addition, midpoint method stuff, we need to make sure that we check the signs of quantity and the sign of price or income, right. So there we go. We kind of have everything about the midpoint method and all our different elasticities in one place, and since we had some extra space on the page, I went ahead and gave you even a little more information here in the bottom. Remember when we talked about the straight line demand curve and where there was a point where we maximize revenue? Boom, we got it right here. To the left of that middle point is going to be elastic, to the right of that middle point is inelastic, at that point, we're unit elastic and that's where we maximize revenue, and we've got a little information about total revenue over here and, what happens with different price changes, right? If the price goes up and total revenue goes up, then we've got inelastic demand just like the other cases there, right? So we've kind of got everything from the chapter on one page here. You guys should feel pretty comfortable using this while you're studying and then you'll ace it once you get to the test. Cool, let's do a couple more practice problems before we wrap up elasticity.
- 1. Introduction to Macroeconomics1h 57m
- 2. Introductory Economic Models59m
- 3. Supply and Demand3h 43m
- Introduction to Supply and Demand10m
- The Basics of Demand7m
- Individual Demand and Market Demand6m
- Shifting Demand44m
- The Basics of Supply3m
- Individual Supply and Market Supply6m
- Shifting Supply28m
- Big Daddy Shift Summary8m
- Supply and Demand Together: Equilibrium, Shortage, and Surplus10m
- Supply and Demand Together: One-sided Shifts22m
- Supply and Demand Together: Both Shift34m
- Supply and Demand: Quantitative Analysis40m
- 4. Elasticity2h 26m
- Percentage Change and Price Elasticity of Demand19m
- Elasticity and the Midpoint Method20m
- Price Elasticity of Demand on a Graph11m
- Determinants of Price Elasticity of Demand6m
- Total Revenue Test13m
- Total Revenue Along a Linear Demand Curve14m
- Income Elasticity of Demand23m
- Cross-Price Elasticity of Demand11m
- Price Elasticity of Supply12m
- Price Elasticity of Supply on a Graph3m
- Elasticity Summary9m
- 5. Consumer and Producer Surplus; Price Ceilings and Price Floors3h 40m
- Consumer Surplus and WIllingness to Pay33m
- Producer Surplus and Willingness to Sell26m
- Economic Surplus and Efficiency18m
- Quantitative Analysis of Consumer and Producer Surplus at Equilibrium28m
- Price Ceilings, Price Floors, and Black Markets38m
- Quantitative Analysis of Price Ceilings and Floors: Finding Points20m
- Quantitative Analysis of Price Ceilings and Floors: Finding Areas54m
- 6. Introduction to Taxes1h 25m
- 7. Externalities1h 3m
- 8. The Types of Goods1h 13m
- 9. International Trade1h 16m
- 10. Introducing Economic Concepts49m
- Introducing Concepts - Business Cycle7m
- Introducing Concepts - Nominal GDP and Real GDP12m
- Introducing Concepts - Unemployment and Inflation3m
- Introducing Concepts - Economic Growth6m
- Introducing Concepts - Savings and Investment5m
- Introducing Concepts - Trade Deficit and Surplus6m
- Introducing Concepts - Monetary Policy and Fiscal Policy7m
- 11. Gross Domestic Product (GDP) and Consumer Price Index (CPI)1h 37m
- Calculating GDP11m
- Detailed Explanation of GDP Components9m
- Value Added Method for Measuring GDP1m
- Nominal GDP and Real GDP22m
- Shortcomings of GDP8m
- Calculating GDP Using the Income Approach10m
- Other Measures of Total Production and Total Income5m
- Consumer Price Index (CPI)13m
- Using CPI to Adjust for Inflation7m
- Problems with the Consumer Price Index (CPI)6m
- 12. Unemployment and Inflation1h 22m
- Labor Force and Unemployment9m
- Types of Unemployment12m
- Labor Unions and Collective Bargaining6m
- Unemployment: Minimum Wage Laws and Efficiency Wages7m
- Unemployment Trends7m
- Nominal Interest, Real Interest, and the Fisher Equation10m
- Nominal Income and Real Income12m
- Who is Affected by Inflation?5m
- Demand-Pull and Cost-Push Inflation6m
- Costs of Inflation: Shoe-leather Costs and Menu Costs4m
- 13. Productivity and Economic Growth1h 17m
- 14. The Financial System1h 37m
- 15. Income and Consumption52m
- 16. Deriving the Aggregate Expenditures Model1h 22m
- 17. Aggregate Demand and Aggregate Supply Analysis1h 18m
- 18. The Monetary System1h 1m
- The Functions of Money; The Kinds of Money8m
- Defining the Money Supply: M1 and M24m
- Required Reserves and the Deposit Multiplier8m
- Introduction to the Federal Reserve8m
- The Federal Reserve and the Money Supply11m
- History of the US Banking System9m
- The Financial Crisis of 2007-2009 (The Great Recession)10m
- 19. Monetary Policy1h 32m
- 20. Fiscal Policy1h 0m
- 21. Revisiting Inflation, Unemployment, and Policy46m
- 22. Balance of Payments30m
- 23. Exchange Rates1h 16m
- Exchange Rates: Introduction14m
- Exchange Rates: Nominal and Real13m
- Exchange Rates: Equilibrium6m
- Exchange Rates: Shifts in Supply and Demand11m
- Exchange Rates and Net Exports6m
- Exchange Rates: Fixed, Flexible, and Managed Float5m
- Exchange Rates: Purchasing Power Parity7m
- The Gold Standard4m
- The Bretton Woods System6m
- 24. Macroeconomic Schools of Thought40m
- 25. Dynamic AD/AS Model35m
- 26. Special Topics11m
Elasticity Summary - Online Tutor, Practice Problems & Exam Prep
Understanding price elasticity of demand and supply is crucial for analyzing market behavior. The formula for price elasticity is percentage change in quantity demandedpercentage change in price. An elasticity greater than 1 indicates elastic demand. Additionally, income elasticity and cross-price elasticity help determine the nature of goods—normal, substitutes, or complements—where sign matters. The midpoint method aids in calculations, and recognizing the relationship between total revenue and elasticity is essential for maximizing revenue in various market conditions.
Elasticity Summary
Video transcript
A linear, downward-sloping demand curve is
An increase in the supply of a good will increase the total revenue producers receive if:
A life-saving machine without any close substitutes will tend to have:
Here’s what students ask on this topic:
What is the formula for price elasticity of demand?
The formula for price elasticity of demand (PED) is given by:
∆Q/Q∆P/P
Where ∆ represents the change in quantity demanded (Q) and price (P). This formula calculates the percentage change in quantity demanded divided by the percentage change in price. If the result is greater than 1, the demand is elastic; if it is less than 1, the demand is inelastic.
How do you interpret the value of price elasticity of demand?
The value of price elasticity of demand (PED) indicates how sensitive the quantity demanded of a good is to a change in its price. If PED > 1, demand is elastic, meaning consumers are highly responsive to price changes. If PED < 1, demand is inelastic, indicating consumers are less responsive to price changes. If PED = 1, demand is unit elastic, meaning the percentage change in quantity demanded is equal to the percentage change in price. Understanding PED helps businesses and policymakers make informed decisions about pricing and taxation.
What is the midpoint method for calculating elasticity?
The midpoint method is used to calculate elasticity to avoid discrepancies caused by the direction of change. The formula for price elasticity of demand using the midpoint method is:
∆Q/Q+Q'2∆P/P+P'2
Where ∆ represents the change in quantity (Q) and price (P), and Q' and P' are the initial quantities and prices. This method provides a more accurate measure of elasticity by averaging the initial and final values.
What is the difference between income elasticity of demand and cross-price elasticity of demand?
Income elasticity of demand (YED) measures how the quantity demanded of a good responds to changes in consumer income. The formula is:
∆Q/Q∆I/I
Where ∆ represents the change in quantity demanded (Q) and income (I). A positive YED indicates a normal good, while a negative YED indicates an inferior good.
Cross-price elasticity of demand (XED) measures how the quantity demanded of one good responds to changes in the price of another good. The formula is:
∆Q_X/Q_X∆P_Y/P_Y
Where ∆ represents the change in quantity demanded of good X (QX) and the price of good Y (PY). A positive XED indicates substitute goods, while a negative XED indicates complementary goods.
How does elasticity affect total revenue?
Elasticity significantly impacts total revenue (TR), which is calculated as price (P) multiplied by quantity demanded (Q). If demand is elastic (PED > 1), a price increase will lead to a proportionally larger decrease in quantity demanded, reducing total revenue. Conversely, if demand is inelastic (PED < 1), a price increase will lead to a smaller decrease in quantity demanded, increasing total revenue. When demand is unit elastic (PED = 1), changes in price do not affect total revenue. Understanding this relationship helps businesses set optimal pricing strategies to maximize revenue.