Why Prices Don’t Change Demand | Elasticity of Demand | What is Elasticity скачать в хорошем качестве

Why Prices Don’t Change Demand | Elasticity of Demand | What is Elasticity

How do prices change demand? What is elasticity of demand and why should anyone care? How does elasticity of demand impact the overall economy? All questions, I’ll pretend to answer! 0:00 - Elasticity of Demand Example Think about how if you go to the store to buy some milk and find out that instead of $2, it ends up being $4. You might still end up buying it because how else are you to eat cereal. But let's say you go to the same store and you were going to buy a $2 candy bar and then it ends up being $4 in price. That candy bar better have the golden ticket otherwise you can bet that I’m going for a bag of chips instead. This situation is a good elasticity of demand example. So even though they both had the same increase in price, and they both are things you want, but don’t really need, how price impacts demand ends up being different. Part of this has to do with something called the substitution effect. All that means is that the more options I have in the same category, the less I’m willing to tolerate. Ok so I’m willing to tolerate a bigger price change when I have less options. Big deal and pretty obvious. Well this whole concept may be a lot more important than you think. 1:04 - Elasticity of Demand Example Let's say you wanted to curb the amount a country smokes, it's important you understand that price won’t have a big impact because there aren’t too many different options when it comes to it. And since we know that increasing the price on something that has little substitutes won’t really change people’s actions then we may have to think of different options. A tax, even a huge tax, may not have that great of an impact. In fact, a creative solution that has been tested in different countries is to have the outside packaging have some certain pictures that dissuade the user. The point being, price wasn’t an effective option on impacting demand which relates to this concept of elasticity. 2:08 - Examples of elasticity in day to day life you go to the store and between buying a twix bar, snickers bar or any chocolate, let's pretend that you like all equally. So you go to the store and the snickers bar is ten cents cheaper, since you have no preference you will buy the cheaper option. This is exactly how you end up with price wars. You see this with products, business and services that are basically the same. They can only compete in price because there isn’t much to distinguish the two which shows how elasticity of demand relates to businesses. Now, this is what some companies do very well. They have such a strong brand identity, there is no substitute. And in fact, this has huge financial gains as well because think about the high mark up on some of these products, it relates back to feeling like there is no substitute. 3:29 - Elasticity and its applications So how does elasticity matter to me, and why do I care in my personal life. Well companies know these types of tricks and even salesmen and they’ll exploit it to their benefit Let's say you went into a bank and wanted to compare their best offer on a loan or mortgage with another bank. If you try to leave and say, you just want to understand what else is out there. They will emphasize how everything is basically the same. This is especially true if the company is the type to only focus on price. Because if they convince you two banks are the same and they have a better price, they’ll win your business. But yet, the reverse happens when you go to another bank that focuses on service. They know they need to try extra hard to convince you that they aren’t like other banks and service matters. They may charge a higher price but they try to get you to focus on just the service. So how do you combat people using elasticity of demand to their advantage. Well, you need to focus on your wants and really understand them. If I only care about price, then don’t let anyone try to convince you about why service matters If you do care about service, try to put a hard value on it. Don’t just say, I’m willing to pay more for better service. Try to think, how much better service do I need, to justify a 10% increase in price. In the end, elasticity of demand has huge implications beyond just the individual and is really important in economics. 6:06 - Elasticity of demand and the Economy Now how does elasticity relate to economics and the entire economy? Well rather than only talk about how it relates to microeconomics, in macroeconomics, it comes into play because of taxes and how the demand changes between countries. Think about a good that is only provided by one country, if we implement some type of tariff, it won’t have much of an impact on demand since the price doesn’t matter as much since there are no other options. But take a product like grain or rice. If there is a tax on rice brought in from one country, there are plenty of other countries that sell rice. So the demand for that one country’s rice will dramatically drop.