Essential Question:

How will consumers and producers react to changes in prices?

Enduring Understandings:

Price Elasticity of Demand (PED) is a measure of how sensitive consumers are to a change in price. If the price goes up, how many fewer people will buy the product? If the price goes down, how many more people will buy it?
Not all goods and services have the same elasticity of demand. Some goods are more elastic than others. There are three simple questions to ask to test the elasticity of a good. 1.) Can the purchase be delayed? 2.) Are there substitutes (other goods that can be used it its place)? 3.) Is the purchase a large percentage of income? Answering yes to these questions means that the good has an elastic demand. Answering no to these questions means that the good has an inelastic demand. While there are exceptions to these rules, these are good guidelines to start with.
If the demand for a good is elastic, that means that the change in quantity demanded will be greater than the change in price. On the other hand, if the demand for a good is inelastic, than the change in demand for the good will be less than the change in price.

Price Elasticity of Supply (PES) is a measure of how sensitive producers are to a change in price. If the price of their product goes up, how many more will they be willing to sell? If the price of their product goes down, how many fewer will they be willing to sell?
Not all goods and services have the same elasticity of supply. Some goods are more elastic than others. There are two simple questions to ask to test the elasticity of a good. 1.) Can more of the good be easily created? 2.) Can more of the good be produced without requiring large changes to the amount of labor and capital required? Answering yes to these questions means that the good has an elastic supply. Answering no to these questions means that the good has an inelastic supply.While there are also exceptions to these rules, these are good guidelines to start with.
If the supply for a good is elastic, that means that the change in quantity demanded will be greater than the change in price. On the other hand, if the supply for a good is inelastic, than the change in demand for the good will be less than the change in price.

Examples:

Is the demand for plane tickets elastic or inelastic? Try to determine the answer by using the three test questions above. The purchase of plane tickets can be delayed. There are substitutes, such as trains and buses. And a plane ticket can be a large percentage of income. Therefore, in general, the demand for plane tickets is elastic. A bright student will point out that this is more true for a vacationer than for a business traveler, so different people will have different elasticities.

Is the supply of beach front property elastic or inelastic? Try to determine the answer by using the two test questions above. More beach front property can not be easily made. Florida only has so many miles of coast line. Making new shoreline would require large changes in the labor and capital used. Therefore, the supply of beach front property is inelastic.

Teaching Note:

Many students find the concept of elasticity difficult. Students need to understand that elasticity is a measure of how sensitive consumers and producers are to price changes and how quickly and severely they react to those price changes. It is a very abstract and theoretical concept. Students that are skilled in math may understand the concept better when put in mathematical terms.

PED = % change in quantity demanded ÷ % change in price

PES = % change in quantity supplied ÷ % change in price

Assessment Examples: Standardized Test Items and samples of student work.


1.) Because a small price increase had little or no effect on the demand for local phone service, the demand for the product is:
a.) elastic
b.) inelastic
c.) unit elastic
d.) none of the above

2.) All of the following products have relatively inelastic demand EXCEPT:
a.) hospital emergency rooms
b.) addictive drugs
c.) MP3 players
d.) food

3.) If the price of a product increases a little and producers increase output dramatically, then supply is:
a.) elastic
b.) inelastic
c.) unit elastic
d.) none of the above


Open Response Question:

Use the concepts of demand and elasticity to explain what will happen to the demand for insulin if the price increases.



The following answers were supplied by students on a unit test. A weak answer and a strong answer have been provided.

Weak Answer
E_2_10_ex_poor.jpg
Strong Answer
E_2_10_ex_strong.jpg
Answers to Multiple Choice Assessment Questions: 1=B , 2=C , 3=A