WEBVTT NOTE 2.06. Elasticity of Demand 1 00:00:00.000 --> 00:00:04.640 6. Elasticity of Demand 2 00:00:04.640 --> 00:00:10.000 The demand schedule tells us how many units of the purchased good will be bought at each 3 00:00:10.000 --> 00:00:16.360 hypothetical price. From this schedule we may easily find the total number of units 4 00:00:16.360 --> 00:00:22.920 of the sale good that will be expended at each price. If three horses are demanded at 5 00:00:22.920 --> 00:00:29.200 a price of 95 barrels of fish, then the total number of units of the sale good that will 6 00:00:29.200 --> 00:00:37.560 will be offered in exchange, will be 3 times 95, or 285 barrels of fish. 7 00:00:37.560 --> 00:00:43.200 This then is the total outlay of the sale good that will be offered on the market at 8 00:00:43.200 --> 00:00:45.300 that price. 9 00:00:45.300 --> 00:00:50.860 Outlay equals price times quantity demanded of purchase good. 10 00:00:50.860 --> 00:00:56.840 But we know that as the price decreases, the demand must either increase or remain the 11 00:00:56.840 --> 00:00:57.840 same. 12 00:00:57.840 --> 00:01:04.360 Therefore, a decrease in price tends to be counteracted by an increase in quantity, and 13 00:01:04.360 --> 00:01:10.560 as a result, the total outlay of the sale good may either increase or decrease as the 14 00:01:10.560 --> 00:01:12.720 price changes. 15 00:01:12.720 --> 00:01:18.520 For any two prices, we may compare the total outlay of the sale good that will be expended 16 00:01:18.520 --> 00:01:20.040 by buyers. 17 00:01:20.040 --> 00:01:26.000 If the lower price yields a greater total outlay than the higher price, the total outlay 18 00:01:26.000 --> 00:01:33.000 Outlay is defined as being elastic over that range. If the lower price yields a lower total 19 00:01:33.000 --> 00:01:40.440 outlay than the higher price, then the outlay is inelastic over that range. Alternatively, 20 00:01:40.440 --> 00:01:47.000 we may say that the former case is that of an elasticity greater than unity, the latter 21 00:01:47.000 --> 00:01:53.320 of an elasticity less than unity, and the case where the total outlay is the same for 22 00:01:53.320 --> 00:02:00.640 for the two prices is one of unit elasticity, or elasticity equal to one. 23 00:02:00.640 --> 00:02:06.280 Since numerical precision in the concept of elasticity is not important, we may simply 24 00:02:06.280 --> 00:02:13.140 use the terms inelastic, elastic, and, for the last case, neutral. 25 00:02:13.140 --> 00:02:16.280 Some examples will clarify these concepts. 26 00:02:16.280 --> 00:02:23.700 Thus suppose that we examine the total outlay schedule at prices of 96 and 95. 27 00:02:23.700 --> 00:02:28.220 At 96, the total outlay is 192 barrels. 28 00:02:28.220 --> 00:02:31.940 At 95, it is 285 barrels. 29 00:02:31.940 --> 00:02:38.460 The outlay is greater at the lower price, and hence the outlay schedule is elastic in 30 00:02:38.460 --> 00:02:40.060 this range. 31 00:02:40.060 --> 00:02:45.020 On the other hand, let us take the prices 95 and 94. 32 00:02:45.020 --> 00:02:53.380 At 94, the outlay is 282. Consequently, the schedule here is inelastic. 33 00:02:53.380 --> 00:02:59.620 There is no reason why the concept of elasticity must be confined to two prices next to each 34 00:02:59.620 --> 00:03:06.120 other. Any two prices on the schedule may be compared. It is evident that an examination 35 00:03:06.120 --> 00:03:12.900 of the entire outlay demonstrates that it is basically elastic. It is elastic over most 36 00:03:12.900 --> 00:03:17.220 of its range, with the exception of a few small gaps. 37 00:03:17.220 --> 00:03:23.820 If we compare any two rather widely spaced prices, it is evident that the outlay is less 38 00:03:23.820 --> 00:03:25.680 at the higher price. 39 00:03:25.680 --> 00:03:31.420 If the price is high enough, the demand for any good will dwindle to zero, and therefore 40 00:03:31.420 --> 00:03:35.100 the outlay will dwindle to zero. 41 00:03:35.100 --> 00:03:41.300 Contrary to what might be thought at first, the concept of elasticity of supply is not 42 00:03:41.300 --> 00:03:45.360 a meaningful one, as is elasticity of demand. 43 00:03:45.360 --> 00:03:51.680 If we multiply the quantity supplied at each price by the price, we obtain the number of 44 00:03:51.680 --> 00:03:57.580 barrels of fish, the sale-good, which the sellers will demand in exchange. 45 00:03:57.580 --> 00:04:04.620 It will easily be seen, however, that this quantity always increases as the price increases, 46 00:04:04.620 --> 00:04:06.120 and vice versa. 47 00:04:06.120 --> 00:04:12.320 The reason is that its other determinant, quantity supplied, changes in the same direction 48 00:04:12.320 --> 00:04:18.240 as the price, not in the inverse direction as does quantity demanded. 49 00:04:18.240 --> 00:04:25.320 As a result, supply is always elastic, and the concept is an uninteresting one. 50 00:04:25.320 --> 00:04:31.240 The attention of some writers to the elasticity of supply stems from an erroneous approach 51 00:04:31.240 --> 00:04:38.040 Much to the entire analysis of utility, supply and demand, they assume that it is possible 52 00:04:38.040 --> 00:04:44.640 to treat human action in terms of infinitely small differences, and therefore to apply 53 00:04:44.640 --> 00:04:51.340 the mathematically elegant concepts of the calculus, etc. to economic problems. 54 00:04:51.340 --> 00:04:57.240 Such a treatment is fallacious and misleading, however, since human action must treat all 55 00:04:57.240 --> 00:05:04.520 All matters only in terms of discrete steps. If, for example, the utility of X is so little 56 00:05:04.520 --> 00:05:11.880 smaller than the utility of Y that it can be regarded as identical or negligibly different, 57 00:05:11.880 --> 00:05:18.480 then human action will treat them as such, that is, as the same good. As a result, the 58 00:05:18.480 --> 00:05:25.900 seemingly precise concept of elasticity at a point, percentage increase in demand divided 59 00:05:25.900 --> 00:05:32.340 by a Negligibly Small Percentage Decrease in Price is completely out of order. 60 00:05:32.340 --> 00:05:39.020 It is this mistaken substitution of mathematical elegance for the realities of human action 61 00:05:39.020 --> 00:05:45.900 that lends a seeming importance to the concept of elasticity of supply, comparable to the 62 00:05:45.900 --> 00:05:48.620 concept of elasticity of demand.