ELASTICITY OF DEMAND

ELASTICITY

Elasticity of demand measures how flexible consumers are to changes in price. Hence the picture of a rubber band.

Elasticity of demand is a very easy topic if it is understood first in general terms.

Consider that the price of going to a doctor rises. Due to the rise in price people will not stop going to the doctor because it is a necessity. However if the price of mercedes rises people will buy a cheaper car instead because mercedes is a luxury car. So the demand for going to the doctor is inelastic whereas the demand for mercedes is elastic

ELASTIC GOODS

Olive

Chocolate milk

Hamburgers

INELASTIC GOODS 

Oil

Milk

Food

Food is inelastic because there is no substitute for it. But hamburgers are elastic because there are substitutes for them. Milk is inelastic because there is no substitute for it but chocolate milk can be substituted by vanilla flavoured milk. Similarly oil has no substitute but olive oil can be substituted by vegetable oil. Therefore oil is inelastic and olive oil is elastic.

In the video the concept of elasticity is introduced. It explains elasticity and its effects on revenue.

What happens to revenue when a demand is elastic or inelastic? 

While explaining taxes I explained what is meant by revenue. In this video it is explained what happens to revenue if the demand is elastic and when it is inelastic. This picture below will help you in understanding the effects of the elasticity or inelasticity on revenue.