econoimcslesson2-4elasticity

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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 andelasticity 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 2-6-1Visual 2-6-2

Elasticity Packet

Elasticity Quiz

Procedure:1. Start lesson by asking students:If you could produce oneproduct 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 increasein 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 studentsto 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 Curved. 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 eyeballingthe 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 necessityB. 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 goodis.

Take the students attention back to the characteristics of a million dollar productand show them how they have already listed the common sense test.

Present the following products and have the students apply them to the common sensetest:

1. New car

2. Pork Chops3. European vacation

4. Coffee

5. Insulin6. 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 andTRWhat 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

PriceChange

Change inTR/TE

XXXXX PriceChange

Change inTR/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 changebehavior?

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.

Ed= _____________________________________________

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p r i c e e l a st i c i t y o f d e m a n d% c h a n g e in q u a n t i td e m

c h a n g e i np r i c e=

%

% c h a n g e i n p r i c e x 12

=P P

P

1

1

% c h a n g e i nq u a n t i t yd e m a n d e d x 12

=Q Q

Q

1

1


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B. The Midpoint Formula

C. When:

Ed > 1 Demand is Elastic (% Change in quantity is greater than % changein 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 yougain or lose from an change in volume of

sales

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

12. Review of Concepts of Elasticity

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

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%

%

( ) /

( ) /

Q

P

Q Q

Q Q

P PP P

d=

+

+

2 1

1 2

2 1

1 2

21 0 0

2

x

x 1 0


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Elasticity Review Chart

Type of

Demand

Price

Change

TR

TE

Price

Change

TR

TE

Value of

Ed

Change in quantity versus change in

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

Inelastic

*** ** *** **

= 0

No change in quantity regardless of

change in price.

13. Assign Elasticity of Demand Packet.

14. Go over packet the next day

Assessment:

Elasticity Quiz

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Total Revenue/Expenditure


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