You've mastered demand curves and shifters! Now let's learn about elasticity - your sensitivity gauge for predicting how much buying behavior changes when prices change.
Some goods are very sensitive to price changes, others barely budge. Elasticity measures this sensitivity precisely.
Engagement Message
What is one product you think is very price-sensitive?
Price elasticity of demand measures how responsive quantity demanded is to price changes. It's calculated as the percentage change in quantity divided by percentage change in price.
Think of it as: "If price goes up 10%, how much does buying drop?"
Engagement Message
If you had to guess - are luxury cars more or less price-sensitive than gasoline?
The midpoint formula helps calculate elasticity accurately. Instead of picking arbitrary starting points, it uses the average of old and new values as the base.
This gives consistent results regardless of whether price rises or falls. We'll cover the specific midpoint formula in a later unit.
Engagement Message
Why might using averages give more reliable measurements?
Here's how to interpret elasticity numbers:
- Greater than 1 = Elastic (very responsive)
- Less than 1 = Inelastic (not very responsive)
- Exactly 1 = Unit elastic
We always use absolute values, so ignore negative signs.
Engagement Message
Which would you expect to be more elastic: salt or restaurant meals?
The total revenue test gives you a quick elasticity check without calculations. When price rises, watch what happens to total revenue (price × quantity).
If revenue falls, demand is elastic. If revenue rises, demand is inelastic.
Engagement Message
If McDonald's raises prices and revenue drops, what does that tell you?
