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Module 11
Defining and Measuring Elasticity
What’s New in the Fourth Edition?
• New Economics in Action.
• Handouts for use in class.
Module Objectives
• Why is elasticity used to measure the response to changes in prices or income?
• What are the different elasticity measures and what do they mean?
Teaching Tips
Calculating the Price Elasticity of Demand
Creating Student Interest
• Present the class with the following scenario: You are suffering from a rare disease and need to take
a single pill every day to stay alive. Right now, you are paying $10 per pill for the life-saving
medication. If the price of the pill goes up to $20 per pill, how many will you buy? What if the price
falls to $5 per pill? Help students to understand that because one pill per day is needed, you will buy
one pill. Also, because the treatment is one pill, there is no need to buy more than one pill per day.
The quantity of pills purchased is unresponsive to changes in price. In this special case, when the
price of the pills changes, there is no change in quantity demanded.
• Choose a student in class and say, “Let’s assume that we both have the same hair stylist or barber.
What would you do if he raised the price of a haircut by $10?” If the student changes hair stylists,
she is demonstrating “responsiveness” to a price change. Indicate that you would not change stylists,
and so your response is less sensitive to a price change. This can lead to a definition of the difference
between inelastic and elastic demand.
• Parking space on campus is limited. Is your demand for a guaranteed space on campus sensitive to
price or not? Would you pay “anything” for it?
• Ask students if the demand for college textbooks is very responsive to price increases. How many
substitutes are available? Have they checked online for textbooks?
Presenting the Material
• Many students struggle with the concept of elasticity. They often have difficulty calculating
elasticity, and they also have difficulty understanding and applying the concept of elasticity. Be sure
to provide a variety of examples to help them with this difficult concept. Since the Module discusses
several different elasticities, it is useful to introduce elasticity as a general concept before introducing
the common elasticities used in economics. If students learn the concept, rather than memorizing
various formulas, they will be better able to interpret elasticities and to apply what they learn to
examples they may see in the future.
• Any elasticity measures the relative responsiveness of one variable to changes in another, making it
possible to calculate elasticity for any two variables that are related. For example, the temperature
elasticity of ice cream measures the relative responsiveness of ice cream consumption to changes in
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the outdoor temperature. Students will probably presume that this will be a positive relationship—
as temperature rises, the quantity of ice cream consumed increases. The question is, by how much?
That is what elasticity tells us.
• Percentages are used because the units of measurement are different and can’t be divided. For
example, ice cream consumption can be measured in cones, cups, scoops, gallons, etc. Temperature
can be measured in degrees Fahrenheit or degrees Celsius. How many scoops are in a degree Celsius?
That doesn’t make sense, so we use percentages. You will need to remind students how to calculate
a percentage change. You can show students how the calculation of elasticity is affected by which
value you start with. This leads into explaining the midpoint formula.
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Module Outline
I. Calculating the Price Elasticity of Demand
A. The price elasticity of demand is the ratio of the percentage change in quantity demanded to
the percentage change in the price as one moves along the demand curve.
% change in quantity demanded price elasticity of demand
% change in price =
B. Using the midpoint method to calculate elasticities.
1. Midpoint formula: Used when you have information about quantity demanded for
widely separated prices.
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1:elastic demand
QQ E
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Case Studies in the Text
Economics in Action
Estimating Elasticities—This EIA explains how elasticities of demand are estimated using real-world
data.
Ask students the following question:
1. Why is it so difficult to estimate the price elasticity of demand? (Other factors affect the
quantity demanded at any price, such as changes in income, population, and tastes. Economists
have to use statistical devices to isolate just the response to a change in price.)
Web Resources
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Handout 11-1
Date_________ Name____________________________ Class________ Professor________________
Calculate the elasticity for the demand schedule below. State whether the measure is elastic, unit
elastic, or inelastic?
Price
Quantity
Elasticity
$22
200
$20
300
$18
400
$16
500
$14
600
$12
700
$10
800
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Answers:
Price
Elasticity
$22
0.73