 Greetings! This is Gerald Friedman, Professor of Economics at the University of Massachusetts at Amherst. And I'm here today to talk about elasticity of demand. That's a mouthful. It's the kind of phrase that you can use with your parents. They'll ask you, what did you learn in college today? And your answer, you learned about the elasticity of demand. And they'll be impressed. They'll be so impressed that they won't know what to say. It's hard to say. You can practice. Elasticity of demand. The elasticity of demand is the relative change in the quantity that people buy when there is a change in price. So if prices go up a little bit, do you buy a lot less or a little bit less? If the price of your puppy goes up, dog food becomes more expensive, vet bills get higher. Do you get rid of your dog? If the price of your puppy goes up a lot, do you get rid of your dog? There are two extreme cases. Well, this isn't quite extreme the way I've drawn them, but we have low elasticity, very little change in price in quantity. When prices change, you get prices go all the way from here up to here. You buy somewhat less. This is low elasticity in elastic demand. This is high elasticity, big change in quantity when you have the same change in price. Now there are two big things about the elasticity. One is the standard model. And if you had this in high school, chances are they talked about elasticity in terms of can you do without the service? How essential is the service to you? Can you live without your puppy? Probably not. So your puppy will be in the low elasticity category. That's actually secondary, though. The more important factor is can you find a substitute for the service? This might be gasoline from Cumberland Farms. Sure, you need gasoline to get to work and to shop and to live in the suburbs and rural areas, but you don't need Cumberland Farms gasoline because if Cumberland Farms raised the prices, you'd just go to Sitco up the street or Sonoco across the street. It's not only about whether you need the service, the product. Donuts, you don't need donuts, but where else are you going to get donuts but Dunkin' Donuts? So Dunkin' Donuts, low elasticity. Penicillin. You think, yeah, you really need penicillin. You'll die without it. Yeah, but you don't need Merck penicillin. There are other antibiotics. There are other companies that make penicillin. If they raise their prices, you just go to one of those. Companies want inelastic demand and that allows them, inelastic demand, allows them to raise prices a lot without worrying about losing sales. So companies want to make demand inelastic and they do this by reducing the possibilities of substitution. It's not only they tell you you need that product because without it, you'll have no sex life and you won't be able to sleep and, hey, I will grow out of your nostrils and things like that. No, what is important is to tell you that you can't get it any place but with them. That prescription drug is the only one that will deal with whatever it is you need. Other prescription drugs may seem to be the same thing, but they'll say no, they're different. They come in a different color. You can get music from lots of places, but only Taylor Swift music is like Taylor Swift. It's actually, well, no comment about that, but that's what they'll tell you. They'll tell you that Miley Cyrus music is unique. That's a whole lot of crap, but that's what they do to reduce the elasticity of demand, making it harder for you to find a substitute. You can buy music from iTunes, you can pay for music from companies, or you can copy music from your friend's computer. Copying allows you to make demand more elastic. The record industry of America and the whole Hollywood establishment is working to make high elasticity into low elasticity by reducing the possibilities of the substitution. They want to create scarcity. Created scarcity is the key to profitability. Make it so your consumers can't get the product any place else. Things you can do. If you're in business school right now, you want to write these down. You want to brand, brand your product, put your name all over it. You want to control access to the technology. Patent your technology. Patent your ways of making things. Trademark. You want to get control over access to resources, essential resources. You want to lock up all the engineers who know how to do this thing so that nobody can copy you. Nobody can create another product. Capitalism, remember, is about profitability, not creating useful things. Every time companies restrict access in order to reduce the elasticity of demand and create profits, they are making the world worse. All these things that companies do to make it harder for you to copy your friend's music are making the world a less happy place. Thank you very much. Have a nice day.