Price Elasticity of Demand

This activity is equally appropriate for an introductory or intermediate microeconomics course to give students an intuitive sense of what elasticities really represent. Students may already know the mathematical definition of a price elasticity of demand but an informal definition is all that is required. The whole activity should take no more than 10-15 minutes.

Overview

Teams are given a list of goods and asked to identify what they think are the most elastic and least elastic in terms of their price elasticities of demand. They should be prepared to explain their answers. The instructor then provides a large table with the price elasticities of demand for many products to prompt a more involved discussion.

Expected Student Learning Outcomes

Know the definition of a price elasticity of demand and approximate the elasticities for a wide range of products.

Information Given to Students

Consider the following products:

A. Fresh green peas
B. Coffee
C. Private education
D. Salt
E. Airline travel, short-run (one month)
F. Airline travel, long-run (one year)

First rank the items from those with most elastic demands to least. Be prepared to report (and defend) your choice of the good with the most elastic demand and the good with the least elastic demand.

doug-ae-2-student-handout.docx (Microsoft Word 2007 (.docx) 13kB Mar7 20)

Make sure to define price elasticity of demand (formally or informally) before the activity starts.
Because many clickers and polling systems only support five choices, instructors may have to do something different with this exercise's six items. The team report can either be in bold Sharpie ink on scratch paper or on white boards if these are available.
After the first report, instructors should ask reporters to explain the reasoning behind their choices, beginning with any teams that just seem confused and moving on to teams that seem to better understand the concept of elasticity. Having a reporter who hasn't yet spoken explain why another team's answer might be mistaken is a good way to get discussion going. You may want give reporters a chance to change their answers.
It's important not to give too much guidance during the first set of reports (most elastic goods) and save the in-depth discussion for the second set.
In closing, make sure to describe the determinants of elasticity: Time, availability of substitutes, and expenditure share.

It's nice at the end to show a table with the correct ranking of the six goods based on estimated price elasticities of demand for various goods and services compiled by Anderson, McLellan, Overton, and Wolfram (1997):

Fresh green peas: 2.8 (absolute value of elasticity estimate)

Airline travel, long-run (one year): 2.4

Private education: 1.1

Coffee: 0.25

Airline travel, short-run (one month): 0.1

Salt: 0.1

The instructor may also want to share with students the whole table of elasticities from the Anderson, McLellan, Overton, and Wolfram article and ask students why the elasticities of some goods are higher than others. For example, why is demand for Chevrolet automobiles more elastic than automobiles in general? Why is demand more elastic for specific goods in the long run than the short run?

Consider five products you have purchased in the last month. For each, explain why you believe demand for it is elastic or inelastic. Order them in terms of elasticity and justify your ordering.