Elasticity 1.2
Part 1: Defining Elasticity and Calculating Price Elasticity of Demand (4.1,4.2)
Part 1: Defining Elasticity and Calculating Price Elasticity of Demand (4.1,4.2)
Questions for the day:
Questions for the day:
1. Explain the concept of price elasticity of demand, understanding that it involves responsiveness of quantity demanded to a change in price, along a given demand curve.
1. Explain the concept of price elasticity of demand, understanding that it involves responsiveness of quantity demanded to a change in price, along a given demand curve.
2. Calculate PED using the following equation: PED = percentage change in quantity demanded/percentage change in price
2. Calculate PED using the following equation: PED = percentage change in quantity demanded/percentage change in price
3. State that PED value is treated as if it were positive although its mathematical value is usually negative.
3. State that PED value is treated as if it were positive although its mathematical value is usually negative.
4. Explain, using diagrams and PED values, the concepts of price elastic demand, price inelastic demand, unit elastic demand, perfectly elastic demand and perfectly inelastic demand.
4. Explain, using diagrams and PED values, the concepts of price elastic demand, price inelastic demand, unit elastic demand, perfectly elastic demand and perfectly inelastic demand.
Elasticity is an umbrella concept: It's the measurement of how one variable changes when another variable changes. This unit we will talk about how demand and supply change as a reaction of a change of P or Y (Price and income)
Elasticity is an umbrella concept: It's the measurement of how one variable changes when another variable changes. This unit we will talk about how demand and supply change as a reaction of a change of P or Y (Price and income)
Note: Elasticity measures the responsiveness of change, and it is the percentage change or proportionate change that is significant. Never say that a SMALL change in price (or income) causes a large change in quantity. Be specific - say that a given price change causes a proportionately smaller (or proportionately larger) change in quantity. Or say that a given percentage change in price leads to a smaller (or larger) percentage change in quantity. Or you could give values: A 10% increase in price leads to a 10% decrease in Quantity demanded. (IB Economics Course Companion)
Note: Elasticity measures the responsiveness of change, and it is the percentage change or proportionate change that is significant. Never say that a SMALL change in price (or income) causes a large change in quantity. Be specific - say that a given price change causes a proportionately smaller (or proportionately larger) change in quantity. Or say that a given percentage change in price leads to a smaller (or larger) percentage change in quantity. Or you could give values: A 10% increase in price leads to a 10% decrease in Quantity demanded. (IB Economics Course Companion)
Intro Video: Real World Economics: Elasticity of Demand from beginning to start of TR graphing (@ 9:20)
Intro Video: Real World Economics: Elasticity of Demand from beginning to start of TR graphing (@ 9:20)
Practice:
Practice:
1. Calculate the PED if a price increase of 50% causes the quantity demanded to fall by 40%.
1. Calculate the PED if a price increase of 50% causes the quantity demanded to fall by 40%.
2. Explain why the PED coefficient is always negative.
2. Explain why the PED coefficient is always negative.
3. What does it mean in "real" terms if a good is inelastic? Give an example of a good that might have an inelastic demand and explain why this could be the case.
3. What does it mean in "real" terms if a good is inelastic? Give an example of a good that might have an inelastic demand and explain why this could be the case.
4. What does it mean if a good is elastic? Give an example and explain.
4. What does it mean if a good is elastic? Give an example and explain.
5. Why might a good have a perfectly inelastic demand or a perfectly elastic demand?
5. Why might a good have a perfectly inelastic demand or a perfectly elastic demand?
Part 2: Determinants of PED
Part 2: Determinants of PED
Questions to answer:
Questions to answer:
1. Explain the determinants of PED, including the number and closeness of substitutes, the degree of necessity, time and the proportion of income spent on the good. (SPLAT! Substitutes, proportion of income, Luxury or Necessity, Addictive?, Time flexibility to make purchase)
1. Explain the determinants of PED, including the number and closeness of substitutes, the degree of necessity, time and the proportion of income spent on the good. (SPLAT! Substitutes, proportion of income, Luxury or Necessity, Addictive?, Time flexibility to make purchase)
2. Calculate PED between two designated points on a demand curve using the PED equation above.
2. Calculate PED between two designated points on a demand curve using the PED equation above.
3. Explain why PED varies along a straight line demand curve and is not represented by the slope of the demand curve.
3. Explain why PED varies along a straight line demand curve and is not represented by the slope of the demand curve.
Activity 3: Poster – Determinants of PED
Activity 3: Poster – Determinants of PED
Count students off into groups of 3 and hand each a piece of poster paper. Each group is to create a poster depicting each of the 5 determinants of PED using specific product examples.
Count students off into groups of 3 and hand each a piece of poster paper. Each group is to create a poster depicting each of the 5 determinants of PED using specific product examples.
Show examples of BOTH elastic and inelastic products
Show examples of BOTH elastic and inelastic products
-Substitutes (are there substitute products?)
-Substitutes (are there substitute products?)
-Proportion of Income (Y)
-Proportion of Income (Y)
-Luxury good vs. Necessity
-Luxury good vs. Necessity
-Addictive?
-Addictive?
-Time consumers have to make a decision to buy (include short run and long run for one product)
-Time consumers have to make a decision to buy (include short run and long run for one product)
Exit Slip:
Exit Slip:
1. Explain the concept of price elasticity of demand, understanding that it involves responsiveness of quantity demanded to a change in price, along a given demand curve.
1. Explain the concept of price elasticity of demand, understanding that it involves responsiveness of quantity demanded to a change in price, along a given demand curve.
2. Calculate PED using the following equation: PED = percentage change in quantity demanded/percentage change in price
2. Calculate PED using the following equation: PED = percentage change in quantity demanded/percentage change in price
3. State that PED value is treated as if it were positive although its mathematical value is usually negative.
3. State that PED value is treated as if it were positive although its mathematical value is usually negative.
4. Explain, using diagrams and PED values, the concepts of price elastic demand, price inelastic demand, unit elastic demand, perfectly elastic demand and perfectly inelastic demand.
4. Explain, using diagrams and PED values, the concepts of price elastic demand, price inelastic demand, unit elastic demand, perfectly elastic demand and perfectly inelastic demand.
5. Explain the determinants of PED, including the number and closeness of substitutes, the degree of necessity, time and the proportion of income spent on the good.
5. Explain the determinants of PED, including the number and closeness of substitutes, the degree of necessity, time and the proportion of income spent on the good.
6. Calculate PED between two designated points on a demand curve using the PED equation above.
6. Calculate PED between two designated points on a demand curve using the PED equation above.
7. Explain why PED varies along a straight line demand curve and is not represented by the slope of the demand curve.
7. Explain why PED varies along a straight line demand curve and is not represented by the slope of the demand curve.
Part 3: Review and Applications of price elasticity of demand
Part 3: Review and Applications of price elasticity of demand
Part 4: Applications of PED
Part 4: Applications of PED
Questions for the day:
Questions for the day:
1. Examine the role of PED for firms in making decisions regarding price changes and their effect on total revenue.
1. Examine the role of PED for firms in making decisions regarding price changes and their effect on total revenue.
2. Explain why the PED for many primary commodities is relatively low and the PED for manufactured products is relatively high.
2. Explain why the PED for many primary commodities is relatively low and the PED for manufactured products is relatively high.
3. Examine the significance of PED for government in relation to indirect taxes.
3. Examine the significance of PED for government in relation to indirect taxes.
4. What is the total revenue test and how does it help firms make decisions about price?
4. What is the total revenue test and how does it help firms make decisions about price?
Activity 1 Practice: Students to open “1.2B - Applying Elasticity to the Real World” – read through each story and discuss answers.
Activity 1 Practice: Students to open “1.2B - Applying Elasticity to the Real World” – read through each story and discuss answers.
Activity 2: Application of PED Determinants
Activity 2: Application of PED Determinants
Students to take a product that their family is somehow associated with (if they produce something, use it - if not, something the family consumes). Relate each of the 5 determinants to the product then assess its overall elasticity based on an overall look at the 5 things.
Students to take a product that their family is somehow associated with (if they produce something, use it - if not, something the family consumes). Relate each of the 5 determinants to the product then assess its overall elasticity based on an overall look at the 5 things.
Total Revenue Test Review:
Total Revenue Test Review:
Answer the following in your notes:
Answer the following in your notes:
PED & Taxes: Why do governments impose “sin taxes” (gasoline, cigarettes and alcohol)? Use PED in your response!
PED & Taxes: Why do governments impose “sin taxes” (gasoline, cigarettes and alcohol)? Use PED in your response!
Part 6: Income elasticity of demand (YED) 4.5 and Price Elasticity of Supply
Part 6: Income elasticity of demand (YED) 4.5 and Price Elasticity of Supply
Questions for the Day:
Questions for the Day:
1. Explain the concept of income elasticity of demand and how it involves responsiveness of demand (and hence a shifting demand curve) to a change in income.
1. Explain the concept of income elasticity of demand and how it involves responsiveness of demand (and hence a shifting demand curve) to a change in income.
2. Calculate YED using the following equation: YED = percentage change in quantity demanded/percentage change in income
2. Calculate YED using the following equation: YED = percentage change in quantity demanded/percentage change in income
3. Show that normal goods have a positive value of YED and inferior goods have a negative value of YED
3. Show that normal goods have a positive value of YED and inferior goods have a negative value of YED
4. Distinguish, with reference to YED, between necessity (income inelastic) goods and luxury (income elastic) goods.
4. Distinguish, with reference to YED, between necessity (income inelastic) goods and luxury (income elastic) goods.
5. Examine the implications for producers and for the economy of a relatively low YED for primary products, a relatively higher YED for manufactured products, and an even higher YED for services.
5. Examine the implications for producers and for the economy of a relatively low YED for primary products, a relatively higher YED for manufactured products, and an even higher YED for services.
Review Questions for calculating YED: (From Oxford Course Companion)
Review Questions for calculating YED: (From Oxford Course Companion)
A consumer had an increase in income, following a salary rise, from $80,000 per year to $100,000 per year. In the following year, her expenditure on holidays increased from $8000 to $10,000, her expenditure on gym memberships remained the same, and her expenditure on locally produced clothes fell from $2000 to $1500.
A consumer had an increase in income, following a salary rise, from $80,000 per year to $100,000 per year. In the following year, her expenditure on holidays increased from $8000 to $10,000, her expenditure on gym memberships remained the same, and her expenditure on locally produced clothes fell from $2000 to $1500.
1. Calculate her income elasticity of demand for holidays.
1. Calculate her income elasticity of demand for holidays.
2. Explain what the value of her income elasticity of demand for holidays means.
2. Explain what the value of her income elasticity of demand for holidays means.
3. Calculate her income elasticity of demand for gym membership.
3. Calculate her income elasticity of demand for gym membership.
4. Explain what the value of her income elasticity of demand for gym membership means.
4. Explain what the value of her income elasticity of demand for gym membership means.
5. Calculate her income elasticity of demand for locally produced clothes.
5. Calculate her income elasticity of demand for locally produced clothes.
6. Explain what the value of her income elasticity for locally produced clothes means.
6. Explain what the value of her income elasticity for locally produced clothes means.
Activity 2: Econ in the News: Why has college tuition increased so much? How is this related to income elasticity of demand. Is college a luxury good or a normal good?
Activity 2: Econ in the News: Why has college tuition increased so much? How is this related to income elasticity of demand. Is college a luxury good or a normal good?
Activity 3: Review by answering the following in your notes:
Activity 3: Review by answering the following in your notes:
1. Explain the concept of income elasticity of demand and how it involves responsiveness of demand (and hence a shifting demand curve) to a change in income.
1. Explain the concept of income elasticity of demand and how it involves responsiveness of demand (and hence a shifting demand curve) to a change in income.
2. Calculate YED using the following equation: YED = percentage change in quantity demanded/percentage change in income
2. Calculate YED using the following equation: YED = percentage change in quantity demanded/percentage change in income
3. Show that normal goods have a positive value of YED and inferior goods have a negative value of YED
3. Show that normal goods have a positive value of YED and inferior goods have a negative value of YED
4. Distinguish, with reference to YED, between necessity (income inelastic) goods and luxury (income elastic) goods.
4. Distinguish, with reference to YED, between necessity (income inelastic) goods and luxury (income elastic) goods.
5. Examine the implications for producers and for the economy of a relatively low YED for primary products, a relatively higher YED for manufactured products, and an even higher YED for services.
5. Examine the implications for producers and for the economy of a relatively low YED for primary products, a relatively higher YED for manufactured products, and an even higher YED for services.
Part 7: Price Elasticity of Supply
Part 7: Price Elasticity of Supply
How might a rise in the price of sugary snacks impact consumers in the UK?
How might a rise in the price of sugary snacks impact consumers in the UK?
Relate this to PED and a determinant of PED.
Relate this to PED and a determinant of PED.
What do you think producers should do based on the article and what you know about elasticity?
What do you think producers should do based on the article and what you know about elasticity?
Questions for the day:
Questions for the day:
1. Explain the concept of price elasticity of supply, understanding that in involves responsiveness of quantity supplied to a change in price along a given supply curve.
1. Explain the concept of price elasticity of supply, understanding that in involves responsiveness of quantity supplied to a change in price along a given supply curve.
2. Calculate PES using the following equation: PES = percentage change in quantity supplied/percentage change in price.
2. Calculate PES using the following equation: PES = percentage change in quantity supplied/percentage change in price.
3. Explain, using diagrams and PES values, the concepts of elastic supply, inelastic supply, unit elastic supply, perfectly elastic supply and perfectly inelastic supply.
3. Explain, using diagrams and PES values, the concepts of elastic supply, inelastic supply, unit elastic supply, perfectly elastic supply and perfectly inelastic supply.
4. Explain the determinants of PES, including time, mobility of factors of production, unused capacity and ability to store stocks.
4. Explain the determinants of PES, including time, mobility of factors of production, unused capacity and ability to store stocks.
5. Explain why the PES for primary commodities is relatively low and the PES for manufactured products is relatively high.
5. Explain why the PES for primary commodities is relatively low and the PES for manufactured products is relatively high.
Activity 1:
Activity 1:
Figure out the PES for 2 sets of points from this S schedule for cappuccino:
Figure out the PES for 2 sets of points from this S schedule for cappuccino:
Is the PES the same between each set of points? Why?
Is the PES the same between each set of points? Why?
The lower the price the more inelastic. Producers don't have as much incentive to produce more if they only make a small amt more revenue.
The lower the price the more inelastic. Producers don't have as much incentive to produce more if they only make a small amt more revenue.
More practice: Students to write 3 S schedules then change schedules with a partner. To graph each of the schedules then figure the PES between any 2 points.
More practice: Students to write 3 S schedules then change schedules with a partner. To graph each of the schedules then figure the PES between any 2 points.
Part 8: Determinants of PES
Part 8: Determinants of PES
Summary of the PES determinants:
Summary of the PES determinants:
1. Costs of Production: How much costs rise as output increases.
1. Costs of Production: How much costs rise as output increases.
- existence of unused capacity (productive resources like land, labor, capital)
- existence of unused capacity (productive resources like land, labor, capital)
- mobility of factors of production (can factors of production easily be used to make something else? Then, PES is relatively elastic
- mobility of factors of production (can factors of production easily be used to make something else? Then, PES is relatively elastic
2. Time: The longer the producer has to respond to a change in price, the more elastic the PES.
2. Time: The longer the producer has to respond to a change in price, the more elastic the PES.
3. Ability to store stock: If a producer can hold inventory and not sell right away, they will be able to easily respond to a change in price with a change in QS (Elastic PES).
3. Ability to store stock: If a producer can hold inventory and not sell right away, they will be able to easily respond to a change in price with a change in QS (Elastic PES).
Discuss: Why is the price elasticity of supply for commodities more INELASTIC than the elasticity of supply for manufactured goods? Ask the interwebs and see what you find. We will discuss. Draw a graph representing the supply and demand of an inelastic good and indicate what a shift in demand would do to the price of the good. Do the same for an elastic good.
Discuss: Why is the price elasticity of supply for commodities more INELASTIC than the elasticity of supply for manufactured goods? Ask the interwebs and see what you find. We will discuss. Draw a graph representing the supply and demand of an inelastic good and indicate what a shift in demand would do to the price of the good. Do the same for an elastic good.
Review Question:
Review Question:
A firm producing stuffed toys experiences an increase in demand for its main product, a cuddly dog, because of an increase in its popularity. The price of the toy rises from $15 to $18. In response, the firm increases its output of the toy from 5,000 per week to 5500 per week.
A firm producing stuffed toys experiences an increase in demand for its main product, a cuddly dog, because of an increase in its popularity. The price of the toy rises from $15 to $18. In response, the firm increases its output of the toy from 5,000 per week to 5500 per week.
1. Using a demand and supply digram, explain whey the price of the toy dog has increased.
1. Using a demand and supply digram, explain whey the price of the toy dog has increased.
2. Calculate the elasticity of supply for the dog.
2. Calculate the elasticity of supply for the dog.
Review by answering the following in your notes:
Review by answering the following in your notes:
1. Explain the concept of price elasticity of supply, understanding that in involves responsiveness of quantity supplied to a change in price along a given supply curve.
1. Explain the concept of price elasticity of supply, understanding that in involves responsiveness of quantity supplied to a change in price along a given supply curve.
2. Calculate PES using the following equation: PES = percentage change in quantity supplied/percentage change in price.
2. Calculate PES using the following equation: PES = percentage change in quantity supplied/percentage change in price.
3. Explain, using diagrams and PES values, the concepts of elastic suply, inelastic supply, unit elastic supply, perfectly elastic supply and perfectly inelastic supply.
3. Explain, using diagrams and PES values, the concepts of elastic suply, inelastic supply, unit elastic supply, perfectly elastic supply and perfectly inelastic supply.
4. Explain the determinants of PES, including time, mobility of factors of production, unused capacity and ability to store stocks.
4. Explain the determinants of PES, including time, mobility of factors of production, unused capacity and ability to store stocks.
5. Explain why the PES for primary commodities is relatively low and the PES for manufactured products is relatively high.
5. Explain why the PES for primary commodities is relatively low and the PES for manufactured products is relatively high.
Reminder: Elasticity measures the responsiveness of change, and it is the percentage change or proportionate change that is significant. Never say that a SMALL change in price (or income) causes a large change in quantity. Be specific-say that a given price change causes a proportionately smaller (or proportionately larger) change in quantity. Or say that a given percentage change in price leads to a smaller (or larger) percentage change in quantity. Or you could give values: A 10% increase in price leads to a 10% decrease in Quantity demanded. (IB Economics Course Companion)
Reminder: Elasticity measures the responsiveness of change, and it is the percentage change or proportionate change that is significant. Never say that a SMALL change in price (or income) causes a large change in quantity. Be specific-say that a given price change causes a proportionately smaller (or proportionately larger) change in quantity. Or say that a given percentage change in price leads to a smaller (or larger) percentage change in quantity. Or you could give values: A 10% increase in price leads to a 10% decrease in Quantity demanded. (IB Economics Course Companion)
Unit Review and Practice Paper 1
Unit Review and Practice Paper 1
Do Now Review of PES:
Do Now Review of PES:
A firm producing stuffed toys experiences an increase in the demand for its main product, a cuddly dog, because of an increase in its popularity. The price of the toy rises from $15 to $18. In response, the firm increases its output of the toy from 5000 per week to 5,500 per week.
A firm producing stuffed toys experiences an increase in the demand for its main product, a cuddly dog, because of an increase in its popularity. The price of the toy rises from $15 to $18. In response, the firm increases its output of the toy from 5000 per week to 5,500 per week.
1. Using a demand and supply diagram, explain why the price of the toy dog has increased.
1. Using a demand and supply diagram, explain why the price of the toy dog has increased.
2. Calculate the elasticity of supply for the toy dog.
2. Calculate the elasticity of supply for the toy dog.
3. Is the supply inelastic, elastic, or unit elastic.
3. Is the supply inelastic, elastic, or unit elastic.
4. What is one determinant of supply that MAY have led to this PES? Explain. (Costs, time period, ability to store)
4. What is one determinant of supply that MAY have led to this PES? Explain. (Costs, time period, ability to store)
Activity 2: Go through your notes and the book to find all of the formulas and guidelines for determining PED, YED, and PES. Make a cheat sheet for yourself with formulas and tips for each. Be sure to include things like determinants of PES, PED; what levels of elasticity mean in terms of normal/luxury/inferior goods related to YED; What does it mean for PED to be perfectly inelastic/perfectly elastic/unit elastic? etc. Also, be sure you can graph all of these scenarios.
Activity 2: Go through your notes and the book to find all of the formulas and guidelines for determining PED, YED, and PES. Make a cheat sheet for yourself with formulas and tips for each. Be sure to include things like determinants of PES, PED; what levels of elasticity mean in terms of normal/luxury/inferior goods related to YED; What does it mean for PED to be perfectly inelastic/perfectly elastic/unit elastic? etc. Also, be sure you can graph all of these scenarios.
AND go through all of the questions for the day for the unit above and try to answer them again on your review doc.
AND go through all of the questions for the day for the unit above and try to answer them again on your review doc.
Activity 1:
Activity 1:
Activity 2: Try this part a question:
Activity 2: Try this part a question:
1) a) With the use of examples, explain why some products have a low price elasticity while others have a high elasticity.
1) a) With the use of examples, explain why some products have a low price elasticity while others have a high elasticity.
Review answers
Review answers
Activity 3: How to answer part b questions
Activity 3: How to answer part b questions
What does it mean to "evaluate"? You need to make sure that you are presenting different sides/components of the issue AND clearly state YOUR opinion about it.
What does it mean to "evaluate"? You need to make sure that you are presenting different sides/components of the issue AND clearly state YOUR opinion about it.
From the Oxford Companion: "Part b invites you to use the skill of evaluation, which essentially means making reasoned evaluation including evaluate, discuss, to what extent, compare, contrast, compare and contrast, examine, and justify. Evaluation is a higher order skill and one that you will practice a great deal. It is a process that involves the careful consideration of a topic or issue with a view to forming a balanced conclusion.
From the Oxford Companion: "Part b invites you to use the skill of evaluation, which essentially means making reasoned evaluation including evaluate, discuss, to what extent, compare, contrast, compare and contrast, examine, and justify. Evaluation is a higher order skill and one that you will practice a great deal. It is a process that involves the careful consideration of a topic or issue with a view to forming a balanced conclusion.
For the question below you have to justify your explanation with the development of appropriate theory. An expression such as "The most important reason why a firm would wish to have knowledge of price elasticity of demand is ...........because........." would be appropriate. This would show that you have come to a reasoned decision and then offered an explanation using economic theory.
For the question below you have to justify your explanation with the development of appropriate theory. An expression such as "The most important reason why a firm would wish to have knowledge of price elasticity of demand is ...........because........." would be appropriate. This would show that you have come to a reasoned decision and then offered an explanation using economic theory.
Review responses
Review responses
Mark this student sample Paper 1 and we will discuss how to approach a full paper 1.
Mark this student sample Paper 1 and we will discuss how to approach a full paper 1.
HW: Study for exam! Use the practice questions below and the ones in your book and above to help you study!!!
HW: Study for exam! Use the practice questions below and the ones in your book and above to help you study!!!
1. With the help of examples, explain the determinants of price elasticity of demand.
1. With the help of examples, explain the determinants of price elasticity of demand.
2. A business person wants to increase her revenues. Using appropriate diagrams, explain why knowledge of price elasticity of demand would be useful.
2. A business person wants to increase her revenues. Using appropriate diagrams, explain why knowledge of price elasticity of demand would be useful.
3. With the help of examples, explain the concept of cross price elasticity of demand.
3. With the help of examples, explain the concept of cross price elasticity of demand.
4. With the help of examples, explain the determinants of price elasticity of supply.
4. With the help of examples, explain the determinants of price elasticity of supply.
5. Using income elasticity of demand, explain the difference between normal, necessity, and inferior goods.
5. Using income elasticity of demand, explain the difference between normal, necessity, and inferior goods.
Formative Practice Paper 1 part b
Formative Practice Paper 1 part b
(b) Discuss the practical importance of the concept of PED for the government.
(b) Discuss the practical importance of the concept of PED for the government.