5.1 what is elasticity

Elasticity is introduced using an example of buying Tillamook ice cream. The core idea is to understand how much more of an item is purchased when its price drops. For instance, if ice cream usually costs $3.50, but goes on sale for $3.00, elasticity measures the resulting increase in quantity purchased.

Elasticity is formally defined as a measure of how sensitive consumers are to price changes. The video highlights that a 50-cent price reduction from $3.50 represents a 14% decrease in price.

The calculation of elasticity of demand is explained as the percentage change in quantity divided by the percentage change in price. If quantity purchased also increases by 14% due to a 14% price drop, the elasticity of demand is 1. However, if the quantity increases by 28% (double the price change), the elasticity of demand would be 2.

An elasticity value of 2 means that a 1% change in price leads to a 2% change in quantity. This concept helps explain why stores put certain items on sale and not others, as it depends on the elasticity of demand for those products.