Blog 4: Lesson Plan on the Sensitivity (Elasticity) of Demand

Lesson Plan

Lesson (20 April 2015): Sensitivity (Elasticity) of Demand

Professor: Jessica Castrignano

Objective: Teach students the definition of the sensitivity of elasticity, equation of elasticity, and an example of elasticity calculation.

Materials: Pencil, paper, calculator

Procedure:

1.  What is the sensitivity (elasticity) of demand?

             

  **The sensitivity of demand is made up of two types: inelastic demand and elastic demand.**

                       * Inelastic Demand = Items’ price increase or decrease does not affect                          consumer demand. They are normally necessity products such as light bulbs,                                  batteries, and food.

     

                       * Elastic Demand= Items’ price increase or decrease affects consumer                                             

demand. These items are normally luxury items such as designer                                    clothing, concert tickets, and cars.

2.    What is the purpose of finding the sensitivity of elasticity? (ask the class to brainstorm).

                

                     *The sensitivity of elasticity aids companies in modeling the potential change              in consumer demand due to changes in the price of a good. Thus, a company                                 can learn how consumers react to them increasing or decreasing the price of                          their product(s) to gain a competitive consumer insight in the industry.

          3. Measuring Sensitivity of Elasticity (Formula)

             E= |(p/q)| x |(change in quantity/change in price)|

                   **where  "E" = sensitivity of elasticity

                                    "p" = original price of a single unit

                                    "q"=original quantity sold at the original price

                                    "change in quantity" = original quantity - new quantity

                                    "change in price"=original price - new price

             

            **Question: What do you think this equation translates to in words?

    

               *The elasticity of demand is equal to the original price of a corresponding quantity multiplied by the change in quantity by the corresponding change in price.

        4. Elasticity Rules (Trick):

                 *If E>1, demand is elastic and revenue is increased by lowering the price of an item because consumers will buy less of a item if the price increases or will buy more an item if the price decreases. 

                

                 *If E<1, demand is inelastic and revenue is increased by raising the price of an item 

                  because consumers will continue buying the item regardless of its price increasing 

                  or decreasing.

Tip: So if I ask you on a exam whether a specific an item has elastic or inelastic demand, you will easily know that from finding the elasticity from the equation whether the item is elastic (E>1) or inelastic (E<1).

*************************Now let's practice an example!***************************

Example 1.

         If Whole Foods in Tenleytown decreases the price of their organic strawberries from $6

to $2 per 6 oz. container, this increases their daily sales from 50 6 oz. containers of strawberries to 175 6 oz. containers of strawberries.

           a. Approximate the elasticity of demand for 6 oz. containers of strawberries at a price 

               of $6.

           b. Based on results from part a, should Whole Foods decrease the price per 6 oz. container of strawberries? Hint: does it have elastic or inelastic demand?

  

       Steps (Part a):

                   1. You know that the original price per item is $6 and you know the quantity sold from selling the items at $6 is 50 containers. So, from this you can get the first part of the equation as..($6/50)=.12

                    
                   2. Next, you will use the second part of the equation by solving the change in 
                   quantity over the change in price. The change in quantity will be (175 units-50 
         units) and the change in price will be ($6-$2). So, you simply do (175-50)/(6-2) =31.25.

                   3. Third, you multiply .12 by 31.25 and get a elasticity of 3.75, which is your   
                   answer to part a.

        Formula format: E= |(p/q)| x |(change in quantity/change in price)|
                                       E=|($6/50)| x |(175-50)/($6-$2)
                                       E=3.75

           Step (Part b):

                 1. To determine whether 3.75 is inelastic or elastic demand just remember that 
                 when E<1, demand is inelastic and when E>1, demand is elastic. So, you can see 
                   that the calculated elasticity of 3.75 has elastic demand. Thus, remember that 
                 elastic demand means that consumer demand changes when a good's price 
                 increases or decreases. As a result, Whole Foods should decrease the price per 6 oz 
               container of strawberries because consumer demand will increase, which will cause 
               an increase in revenue for Whole Foods.

Conclusion: Finding the elasticity of demand is vital not only for business to project future operational procedures and revenues, but it is a vital tool for you to use when buying everyday items.

Homework: Find a product (must not have been mentioned already) that has elastic or inelastic demand and explain why it does.