 Okay, this is Gerald Friedman, Professor of Economics at the University of Massachusetts, and we're here to talk about the elasticity of demand. That's a mouthful. You know, sometimes your parents may ask you at dinner, whatever, well, what are you learning with all that tuition money I'm paying out? It's good to have some fancy phrases. One of them is elasticity of demand. Say it yourself, elasticity of demand. It's a mouthful. It's the relative change in quantity for a change in price. So it's the percentage change in the amount people want to buy when there's a change in the price. Why would anybody care? You care because it tells you how responsive the market is when prices change. So when gas prices go up as they've been doing the last few weeks around here, do people stop driving? Do they stop buying gas? Not much, not much. Gasoline is inelastic, inelastic. People don't change the amount they buy when prices go up. Do you get rid of your puppy because dog food prices go up? Probably not. Your demand for your puppy, your demand for puppy love is inelastic. The elasticity of demand, to use that phrase again, elasticity of demand depends on two things. First, can you do without the service? That's what people focus on. Can you live without puppy love? Second, can you find another source if the prices rise? That is not in the textbooks very much. The textbooks focus on can you live without the service? That's a mistake because what really drives the elasticity of demand is the ladder. Can you find another source if prices rise? Can you find another puppy who's cheaper? You say, oh, I would never give up on my puppy, well that's saying you want that particular puppy, not that you want puppy love. If you just want love, find a cheaper one. High and low demand elasticity. Necessities may have elastic demand and this is counterintuitive, but think about it. Which do you need, donuts or penicillin? You need penicillin. If you're sick, if you have a strep throat, if you're dying, if you're a sinus infection, you need an antibiotic. Donuts. Donuts. You don't need donuts. You can live without donuts. Donuts may have a less elastic demand. The elasticity of demand for penicillin may be very high because there's so many places you can get penicillin. You can get it as penicillin from CVS. You can get it on the streets as an antibiotic that somebody's selling in the black market. You can get it from a different drug store. You can get different antibiotics. You can get a prescription for one of those antibiotics that comes in a Z-pack where you only have to take five pills over the course of six days or something like that. There are all different ways to get antibiotics, so any particular antibiotic has a highly elastic demand. Donuts on the other hand, you have to get from Dunkin' Donuts. It's the only place. Other donuts just don't rate. You have to get Dunkin' Donuts. So Dunkin' Donuts has a very inelastic demand because there's no alternative. It's not so much how much you need it, but how hard it is to get something else. Actually, if you live in Amherst, Massachusetts, where I live, don't go to Dunkin'. Go to Henneans. Get there at 7.30 when they first open. Donuts are fresh, warm, magnificent. Okay. So elasticity of demand, fancy words to impress your parents, a lesson. If you want to make money, if you want to run a profitable business, it's not what you sell. It's how much competition you have. Sell something different, distinct, unique, and then you can raise prices and get rich. And on that note, have a nice day. Thank you.