Economics Lesson 2-4: Elasticity

Introduction:

Content Standard:

Objectives:
1. Explain why elasticity is a measure of responsiveness.
2. Analyze the elasticity of a product using the common sense test, total revenue test and
elasticity coefficient.
3. Understand the factors that determine demand elasticity
4. Understand using the total revenue test and elasticity coefficient that a demand curve
with a constant slope does not have constant elasticity.

Lesson Description:

Time Required:

Materials:
Visual 2-6-1
Visual 2-6-2
Elasticity Packet
Elasticity Quiz

Procedure:
1. Start lesson by asking students:
“If you could produce one product and make millions of dollars in one year selling
that product, what would the nature or characteristics of the product be?”

2. List the characteristics on the board as the students call them out and tell the students
that we will return to them.

3. Tell the students that we are going to discuss the price elasticity of demand.
Ask the students what is meant by price elasticity?

Correct Responses: A. The change of quantity demand relative to the change in price.
B. The responsiveness of quantity demanded to a change in price.
C. How much quantity demanded decreases relative to an increase
in price.

4. Show student visual 2-6-1 to demonstrate the concept of price elasticity of demand.

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5. Ask the students why it is important to understand the elasticity of demand.

1. Important to firms.
-How much can we charge before losing revenue (money).
----Viagra
2. Important to government
-What products can we tax and how much.
-How much will taxes change behavior.
-Elasticity of beer, cigarettes, and gas. Booze and gas and drugs

6. Draw the various types of elasticity of demand curves on the board and ask students
to identify, explain and give one product example for each.

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 a. Relatively Inelastic Demand Curve: Gas, Cigs and beer.
b. Relatively Elastic Demand curve: Luxury goods
c. Perfectly Inelastic Demand Curve
d. Perfectly Elastic Demand Curve
1. Sell all you want at price; Why go under and make less, go over and demand
drops to zero.
e. Straight Line Demand Curve: Constant slope but elasticity changes as move down
demand curve. The top of the demand curve is elastic, middle is unitary and
bottom is inelastic.
f. Unitary Elastic Demand: QD changes same proportion as change in price

7. Show Visual 2-6-2 to demonstrate the necessity of a more scientific approach to

determining elasticity.
Because of differences in units going from pounds to oz. or 10 thousand units to one,
we can not empirically examine elasticity of demand for products just by eyeballing
the slopes. We must use other tools such as: (Show Elasticity Powerpoint)

8. Three tests to determine demand elasticity:

A. Common sense test
B. Total Expenditure/Revenue Test
C. Elasticity coefficient Test

9. The Common Sense Test

A. Is it a necessity? Luxury versus necessity
B. Are there poor substitutes? No other products like it or no other producers
C. Do you need it now? Time, can the purchase wait?
D. Does it take a small portion of you income?

• The more questions you answer yes to the more inelastic the demand for the good
is.
• Take the students’ attention back to the characteristics of a million dollar product
and show them how they have already listed the common sense test.

Present the following products and have the students apply them to the common sense
test:
1. New car
2. Pork Chops
3. European vacation
4. Coffee
5. Insulin
6. Insulin at one of four drug stores in a shopping mall.

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10. Total Expenditure/ Revenue Test
A. Total Expenditure/Total Revenue is the same thing
PXQ (off the demand curve)= TE andTR
What the consumer is spending the supplier is making in revenue.
B. Elastic Demand = when price goes down TE/TR goes up
C. Inelastic Demand = When price goes down TE/TR goes down.
D. Unit Elastic = When price goes down TE/TR stay the same.
Total Revenue/Expenditure Test
Price Change in XXXXX Price Change in
Change TR/TE Change TR/TE
Elastic Decrease Increases XXXXX Increases Decrease Opposite
Unit Decrease No change XXXXX Increases No change No change
Inelastic Decrease Decrease XXXXX Increases Increases Same

E. What are the implications of elasticity for firms and governments?

Firms: Will a decrease or increase of the price of our product lead to and
increase or decrease in total revenue?

Government: How much can we tax a product and /or will a tax change
behavior?

11. Elasticity Coefficient:

• Note: because we understand the negative nature of the demand curve, all values
when calculating the elasticity coefficient are absolute values.
A.

% c h n a nq gu e a d n ie t m i t ya n d e d
p r i c te i c e i l t da y se om f= a n d
% c h a n p g r ei c i e n

Q − Q
% c ha n q g u e a d in ne t im t y a = n 2 d e 1 d x 1 0 0 %
Q1
Ed= _____________________________________________
P − P
% c h a n p g r e i= c i2 e n 1 x 1 0 0 %
P1

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 B. The Midpoint Formula
Q2 − Q1
x1 0 0 %
% ∆Qd (Q 1 + Q 2 ) / 2
=
% ∆P P2 − P1
x 1 0 0 %
( P1 + P2 ) / 2

C. When:

Ed > 1 Demand is Elastic (% Change in quantity is greater than % change

in price)

Ed = 1 Demand is Unit Elastic (% change is quantity is equal to the %

change in price.)

Ed < 1 Demand is inelastic (% change in quantity is less than the %

change in price or the % change in price is
greater than % change in quantity.)

The Revenue that you gain or lose because

of a change in price is greater than what you
gain or lose from an change in volume of
sales

Ed = 0 Demand is Perfectly inelastic (Change in price creates no change in

quantity)

12. Review of Concepts of Elasticity

Straight-line demand curve: A Constant slope does not equal constant elasticity.

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 Elasticity Review Chart

Total Revenue/Expenditure

Type of Price TR Price TR Value of Change in quantity versus change in

Demand Change TE Change TE Ed price.
Elastic ↓ ↑ ↑ ↓ > 1.0 Larger % change in quantity
Inelastic ↓ ↓ ↑ ↑ < 1.0 Smaller % change in quantity
Unit Elastic ↓ n/c ↑ n/c =1 Same % change in quanity and price
Perfectly *** ** *** ** No change in quantity regardless of
Inelastic =0 change in price.

13. Assign Elasticity of Demand Packet.

14. Go over packet the next day

Assessment:
Elasticity Quiz

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