[MUSIC] Let's start with elasticity of demand. Elasticity of demand measures the responsiveness of the quantity demanded to a change in price. Formally we will define it as the percent of change in quantity over the percent of change in price. Because of the law of demand and because price and quantity are always negatively related to each other, this is always a negative result or a negative number. So to make it simpler for us we're going to go ahead and take the absolute value of this. And so we get an elasticity of demand. That can be any number between 0 and infinity. What are the advantages of looking at elasticity? Well, it going to measure responsiveness and it's going to measure it in such a way that it's a unit-free measure. Because we're measuring it in terms of percentage change, this means it doesn't matter how we measure the quantity. We could be talking about pound of mangoes, or units of mangoes, or kilograms of mangoes. All these things we're going to talk about the same in terms of percentage change. Similarly it doesn't matter how we measure price. We could be measuring it in dollars, or euros, or dinars. It would be the same percentage change in price. So it's a denomination free measure. And, it also is completely irrelevant what good we're talking about. So we could talk about the elasticity of mangoes, and compare it to the elasticity of apples or the elasticity of bread, or even elasticity of education. So all these goods can be compared, because in terms of elasticity, they are comparable. They're all in terms of percent to change. This range from 0 to infinity is a pretty big range. So let's go ahead and divide into two segments. We are going to distinguish between goods that are inelastic and good that are elastic. A good is going to be inelastic If the elasticity is between 0 and 1 and the good is going to be defined as being elastic, if the elasticity is between one and infinity. And just if you're concerned about the number 1, we can call a good that has an elasticity of 1 unit elastic. And we'll come back to that one in just a minute. So again, elasticity of demands is measured by the percent of change of quantity over the percent of change in price, it's always going to be positive, because we've taken the absolute value. It ranges from 0 to infinity, and we make this important distinction between inelastic demand, and elastic demand. An inelastic demand, means that the percent of change in price is relatively big. And the percentage change in quantity is relatively small. An inelastic demand means that the percentage change in quantity is less than the percentage change in price. On the other hand, an elastic demand means that the demand is very responsive to a change in price and that means the percentage change in quantity is bigger than the percentage change in price. In terms of graphing, an elastic demand is going to be relatively steep. And an elastic demand, all else equal, is going to be relatively flat. And we'll come back a little bit more to a distinction between these, in just a couple of segments.