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Lecture-25 Perfectly Elastic and Perfectly Inelastic Demand - YouTube
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[Music]
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looked at
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elastic zone of the demand curve
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inelastic zone of the demand curve and
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in the middle we get a point where
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demand is unit elastic
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ok that is what we have discussed
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ok now let us discuss the two extreme
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cases
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the one
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extreme case is
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perfectly elastic
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what it means is that you change
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price
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by tiny bit amount and you get
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the maximum possible change in quantity
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demand and what is that maximal possible
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change in quantity demanded that your
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quantity demanded is
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becomes equal to
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zero if price goes up by even
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tiny amount
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ok so let us look at the equation what
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happens
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minus
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p by q
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delta q by delta p
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ok
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and if we get
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the huge change
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if we have very very small change in
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price
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so what we are saying that
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if we use this particular way to write
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it
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that this is even if this is very very
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small
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and this is going to
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be
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very very
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high
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so in that case what should be the value
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of elasticity
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when we have perfectly elastic demand
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infinite it should be
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infinite and how can you draw it
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how would the demand curve look like
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we have q on x axis and p on y axis it
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is horizontal
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and we will come back to this is a very
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special case of the demand function we
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will come back to it its very important
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its like in physics you never get
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frictionless world but you have an
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idealized notion where friction does not
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work similarly we will talk about this
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particular situation we in reality it is
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never observed in
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any real life situation but we will talk
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about it a great deal
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you know just to understand how the
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market functions but not today sometime
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later
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and now similarly we have the opposite
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extreme
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perfectly inelastic
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and that is no matter how big the
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proportional change you bring in price
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you will not get any response in
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change in quantity
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so
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there
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what we have is
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this is equal to
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0
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and
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it does not matter how much how big the
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change you have in price
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so in that case this is equal to 0
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and if you draw
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you will get a
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vertical
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line
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this is perfectly inelastic demand curve
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now also just think about it what
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happens to the total revenue in case of
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perfectly elastic demand curve
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if there is a small increase in the
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price
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total revenue becomes equal to zero
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total revenue becomes equal to zero
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because as
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as soon as you increase the price the
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quantity demanded would fall to zero i
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am talking about a highly idealized
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situation of
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perfectly inelastic perfectly elastic
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ok so in that case
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it will be zero
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and how about perfectly inelastic case
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you keep on increasing the price your
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revenue will keep on
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increasing
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because people would demand
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same quantity of
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this particular good at all the prices
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fine even if you increase the price
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quantity demanded would be the same so
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what is total revenue equal to p
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multiplied by q
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p is going up while q remains the same
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so overall impact would be the total
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increase the increase in total revenue
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fine ok now one thing that you should
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notice
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that whenever we are talking about
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elasticity price elasticity of demand
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we are talking about we are picking a
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particular
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demand function
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ok a particular demand function
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and as it is demand function it is a
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downward sloping curve
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ok it is always a downward sloping curve
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you know you can have a scenario
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when you have perfectly inelastic then
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it is flat but it would never be demand
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curve would never be an upward sloping
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curve
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ok
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now let me talk about a scenario let us
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say that this is an equation for
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banana
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and price and
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apple and banana are substitute
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and price of apple
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goes up what would happen to the demand
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curve
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it shifts rightward
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now
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of course
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if we bring here the supply function
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also let us say the supply function is
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this
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earlier the price market price was
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p star
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and the new market price is
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p dash star can we talk about
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price elasticity of demand
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we cannot talk about price elasticity of
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demand because here
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what has happened the demand curve has
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changed we have moved away from this
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demand curve we have shifted the demand
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function now we are on a new demand
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curve
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ok so when whenever
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we talk about elasticity when only we
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move along a particular demand curve
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while everything else is
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fixed setter is paribus
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and only the price of that particular
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good
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is changing then only we talk about
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price elasticity of demand
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ok
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fine
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now let us take another example just to
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understand
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have you ever heard a farmer saying that
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this year we had bumper crop
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but that is why i am making the loss the
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price has come down so heavily that i am
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making a loss have you ever heard such a
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statement this is quite common whenever
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we have mons very good monsoon
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very very good monsoon farmers are not
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very happy
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probably they they have the same feeling
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which
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they express when they have very poor
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poor monsoon and drought
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so why do you can you explain this
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particular phenomena do you think
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farmers are lying or is there any
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economic reason behind
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exhibiting such a behavior
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so tell me what is that economic reason
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sir because the supplies
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supply has gone up because production of
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every farmer has increased okay
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whereas supply demand remains the same
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so what you are saying is
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what you are saying is that demand for
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crop
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demand for food item let us say for rice
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for wheat for meas
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is almost inelastic
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you demand the same quantity of rice
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in almost all situation again i am
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talking in a highly highly idealized
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fashion not in the exact manner
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ok
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fine so if i can draw
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let me draw it here demand curve is
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almost
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vertical ok i can draw it like this
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and
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let me say this is the supply curve in
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the beginning p
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q this is supply this is demand
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and when you have bumper crop
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what happens
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outward shift
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ok let me redraw it let me say that this
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is the new one
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the earlier one is
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this is the earlier one
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ok and this is the shift
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because of
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better monsoon production will go up
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what is happening to the
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what is happening to the market price
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market price is falling
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heavily
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fee p is p has fallen
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and demand is inelastic so what happens
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to the total revenue
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p has fallen
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ok of course p has fallen so
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q has gone up though
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q has
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gone up
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so what happens to the total revenue
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now can i say the former farmers
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happiness is a function of not the
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amount of quantity they sell but a
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function of total revenue that they earn
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in fact total revenue minus total cost
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but right now we are ignoring the cost
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part just to understand
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ok so what is happening to since
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demand is almost
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perfectly inelastic its not perfectly
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inelastic but i am saying almost
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p has come down
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so q has gone up but how about t r
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it has decreased
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and that is the reason that farmers
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express unhappiness
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even though they have bumper crop
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now this is one example bumper crop
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next example i will not describe it in
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completely because we need more concept
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but just i will give you an idea
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in airline
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let us say you want you you want to
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travel
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six months from now
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and you buy a ticket
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from
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kanpur to delhi
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and let us say
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you
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have you forgot to buy the ticket today
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and you want to buy just one day before
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you travel
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what would be the price to can you
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compare the price of these two tickets
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which one will be more
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one day before and significantly more
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the way airline tickets are priced
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why do you think that airline have
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airlines have this particular kind of
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pricing because
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at one one day before the demand is
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quite inelastic so the demand is quite
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high just demand is one thing let me
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just tell you you are in the right track
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but let me just point out one thing
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even when demand is quite high
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but if price is also very high quantity
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demanded would be very very less
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demand high means
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the demand function whenever we use this
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term demand we are talking about demand
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function not quantity demanded these two
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things are different quantity demanded
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is a point on that demand function
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fine
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so when demand may be very high but
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price is also very high so quantity
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demanded would be very less
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so that is not the reason the reason
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that he was talking about that one day
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in advance
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the
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demand is very very inelastic
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you want to go tomorrow you need to go
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tomorrow
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ok six months from now if you are buying
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again airline would not be able to
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basically also you have to understand
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from a little bit from their perspective
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they do not know
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how inelastic a particular person's
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demand is
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but they have one way to distinguish
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that if a person purchases a ticket well
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in advance it means that person is
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buying for some leisure travel
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that he is planning for vacation and all
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ok so that person has fairly elastic
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demand
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a price goes up he would not travel he
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would travel to some other place or he
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may travel
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using
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train so that person has very elastic
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demand but a person who is typically
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buys ticket on short notice
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they can say they may not know that
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person it may very well be that person
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has poor memory or poor planning skill
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but what they think that majority of
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people who are buying tickets on short
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notice they are business travelers
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and why are they buying tickets because
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they need to attend certain meetings
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where they need to go somewhere for some
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work so their demand is relatively
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inelastic so now think about total
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revenue
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when your demand is inelastic
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and now here airline in this particular
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way airline finds a way to distinguish
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people who have
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elastic demand and who have inelastic
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demand if airline couldnt distinguish
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these two sort different kind of people
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then airline will have to charge the
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same prices
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fine but here using this airline can
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separate
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segment
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the consumer into two different
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categories people with elastic demand
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and people with inelastic demand so when
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i know
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i can guess that you have inelastic
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demand in that case to increase my total
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revenue what should i do
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i should increase the price
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and when i know you have any elastic
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demand what should i do
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i should decrease the price
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so that's what airlines do
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so also the concept of time value of
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services here included
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like uh you are demanding a ticket now
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and i'm providing you right tomorrow
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so the time value you are giving me it
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has a higher time value right now than
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for six months see you see again
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that would be do you think if you want
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to let us say one way to include that
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time value for the logic sake is that
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let me put it in more in in economic
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terms that what you are saying if
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rather than using six month lets use one
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year
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ok just for example
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that i am putting i am giving 100 rupees
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right now
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instead of giving one day before so this
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hundred rupees they can use it for their
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own
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work
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so one way to look at it that what is
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the value that the interest that you can
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earn from the bank or interest you can
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earn in share market so roughly
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interest that you can earn by fare means
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i can say its around 10 to 15 percent in
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india in this particular time
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but the price if you look at the ticket
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of the price tickets
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the difference is not 10 to 15 percent
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its sometime it is four times five times
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means 500 percent so the logic that you
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are giving can be an auxiliary reasons
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but not the primary reasons because if
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that is the reason then the change
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should be just 10 to 15 percent but what
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i suggested that demand is again you
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have to whenever you are explaining you
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have to look at the primary reasons
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i am not saying i am not saying thats
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not a factor that is definitely a factor
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that is the reason that you gave that is
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why when you pay for magazine
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where there it would be more applicable
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when you pay for three years right in
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the beginning you pay significantly less
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amount 30 40 percent less
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the one component is coming from the
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fact that ok
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the money they get immediately that they
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can use to generate more revenue for
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themselves so that is why they are
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giving you discount and second when you
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pay immediately you are guaranteeing
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that for three years you will keep on
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buying
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if you do not register you may buy you
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may not buy
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so for to compensate for these two
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factors they give you use discount even
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in airline that can be a reason but that
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explains very small percentage
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fine
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ok
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ok be digressed
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fine so these two example bumper crops
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and
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airline ticket
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we will come back to airline tickets
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when we talk about monopoly later
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[Music]
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[Music]
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you
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