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Total Revenue and Price Elasticity of Demand: ILD

Rochelle Ruffer, Nazareth College
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This material is replicated on a number of sites as part of the SERC Pedagogic Service Project

Summary

In this ILD, students are asked to predict what will happen to total revenue when college tuition will increase. Following a standard lecture on the relationship between total revenue and price elasticity of demand, students reflect on that relationship by writing a letter to their mom (or other close relative).

Learning Goals

Elastic demand, inelastic demand, changes in total revenue depending on price elasticity of demand

Context for Use

Principles of microeconomics; any size classroom; this is very easy to adapt... it simply adds a predict and reflect step to a basic lecture on the topic. Students have already been introduced to the concept of price elasticity of demand along with the meaning of inelastic and elastic demand. The handout makes reference to an inelastic demand, so it is important they know what that means. This handout can immediately follow the presentation of that information, even the same class period.

Description and Teaching Materials

Students are given a handout of the prediction question. This question would be most meaningful if it is edited for your institution. I have left it specific to my institution for the handout. After students predict the outcome, it is important to give them a couple of minutes to talk with a neighbor. While this isn't critical, it does create a time for them to articulate their thoughts on this subject. You can then discuss briefly what students thought would happen to total revenue prior to lecturing on the topic. Once the lecture on the relationship is complete (inelastic demand: price increases cause total revenue to increase), then ask students to reflect. I have, in the past, assigned this for outside homework if we don't have enough time in class for the reflection.
ILD: Elasticity and Total Revenue (Microsoft Word 29kB Aug20 12)

Teaching Notes and Tips

Students are often confused about the relationship between total revenue and elasticity. The use of an example near and dear to their heart (college tuition) helps. Many students can see how demand for college education might be inelastic, especially for current students. This is a good time to point out the difference between inelastic and perfectly inelastic (some students might leave as a result of the tuition increase, but the percentage decrease in quantity demanded will be smaller than the percentage increase in price).

Assessment

The prediction steps are never graded. It is meant for students to potentially get wrong. The letter to the mother should show some kind of understanding that the inelastic nature of demand is what is driving the effect on total revenue. I usually just grade these for effort, with potentially a check, check+, check - system to keep the students trying.

References and Resources

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