Lesson 16:
Elasticity

Objectives:
Students will be able to:
1) identify demand as being price elastic or price inelastic when given appropriate examples
2) recognize the relationship between percentage changes in the quantity sold that demonstrate a product’s price elasticity of demand
3) identify characteristics of products that tend to make their demand either price elastic or price inelastic and situations in which a product’s price elasticity of demand has economic importance.

Activities:
1) Is the price elastic or inelastic? The relationship of price elasticity to quantity sold.
a) Ask students how much they would pay to hear music played by a local group that is not very popular or talented. Explain that the demand for their music is quite elastic. As the price increases, the quantity demand falls rapidly.
Ask students how much they would pay to see a famous national musician (e.g. Eminem, etc). It is likely that your class, as a group, would buy about the same number of tickets even as the price rises. Explain that the demand for music played by famous performers is quite inelastic. A change in price results in relatively little change in the quantity demanded.
b) Economists describe the demand and supply schedules for various goods and services as elastic if the quantity responses to a change in price are relatively large compared to the change in price. If the quantity responses are relatively small, demand or supply is described as inelastic. Students will identify demand or supply as being elastic or inelastic in each of the following cases: What would happen to the supply and demand curve?
-The price of gasoline doubled in 1973, but consumers reduced their purchases of gasoline by only a small amount.
-Airlines have found that when they lower airfares for vacation travelers, so many people buy seats that airline revenues actually increase.
-The price of oil doubled in 1973 because it takes time to find and drill for new sources of oil.
-Demand for automobiles has risen and dealers are emptying their lots without giving price reductions. Automobile plants that have been running one shift call back their second shift workers and quickly increase the number of cars produced per day.

2) What characteristics of a product make their demand either price elastic or inelastic?
c) Students must list 5 products they believe are necessities and five products they believe are luxuries. What is the current market price for these products? Tell them to assume that the price for all the products just went up by 50%. Assign them to write a paper in which they predict the percentage decline in sales that would result form the increase in price for each product. If sales are cut by more than half, demand is elastic. If sales are cut by less than half, demand is inelastic. Students should find that demand for necessities is less elastic than demand for luxuries.
d)Demand for products that have few close substitutes and that make up a small part of consumers budget tend to be inelastic as is demand for items that are regarded as necessities. Demand for large expenditure items, products with many close substitutes and items regarded as luxuries tends to elastic.
Given a list of products that inelastic or elastic demand, students will state reasons to explain the elasticity of each item. Examples of items with inelastic demand are coffee, medical services, salt, and textbooks. Examples of items with elastic demand are refrigerators, broccoli, fur coats, and steak.

Evaluation:
1) Class participation, work
2) Homework: Students will…
-Read Section E, pg. 81-86
-Answer “Self Check” and “Applying What You Have Learned” questions on pg. 86
- bring in or identify advertisements that are intended to change the price elasticity of demand for their products. These advertisements try to convince their customers that their product is necessary and that no similar product is as good as theirs so that they can charge more for their products while losing few customers. They are trying to make the demand for their product more price inelastic.