Week 5 — Module Overview & Announcement · Elasticity

Course: Principles of Microeconomics (ECON 1) · Silver Oak University (fictional sample) · Prof. Kessler
Objective 3 — Elasticity (price, income, cross) & total revenue · SLO A & B
Dates: Sep 28 – Oct 4, 2026

Start Here — Module Overview

Welcome to Week 5! Last week you solved for equilibrium and traced the effects of supply and demand shifts. This week we add a crucial new question: how much does quantity demanded respond when price, income, or the price of a related good changes? The answer is elasticity — and it drives everything from a firm's pricing strategy to a government's tax policy.

By the end of this week you will be able to:
1. Compute the price elasticity of demand (PED) using the midpoint formula and classify the result as elastic, inelastic, or unit-elastic.
2. Apply the total revenue (TR) test to confirm your PED classification.
3. Compute and interpret income elasticity of demand (YED) and cross-price elasticity of demand (XED).
4. Explain why elasticity is NOT the same as slope — one of the most persistent errors in introductory economics.
5. Identify the determinants of elasticity (substitutes, necessity vs. luxury, time horizon, budget share).

What you'll do this week

Announcement — Week 5: "Why Does Price Matter This Much (or This Little)?"

Posted: Mon, Sep 28, 2026

Hi everyone,

Here's a question that seems simple: if a business raises its price, does it make more money or less?

It depends. Raise the price of something people need — say, insulin or gasoline — and they keep buying almost the same amount, so revenue goes up. Raise the price of something with lots of substitutes — say, a specific brand of soda — and quantity falls sharply, pulling revenue down. The concept that captures this difference is elasticity, and it's one of the most practically useful ideas in the whole course.

This week's core insight — elasticity is NOT slope — is something even intelligent students confuse. Two demand curves can have the same slope but very different elasticities, and the elasticity changes as you move along a linear demand curve even when the slope stays constant. We'll nail this down with pictures and numbers.

The numbers we'll work with this week (all pre-computed and verified):
- Inelastic demand: P rises from $4 to $6; Q falls from 80 to 60. PED = −5/7 ≈ −0.71. Total revenue goes up from $320 to $360 — confirms inelastic.
- Elastic demand: P rises from $10 to $12; Q falls from 100 to 70. PED = −33/17 ≈ −1.94. Total revenue goes down from $1,000 to $840 — confirms elastic.
- Income elasticity: income rises $40k→$60k, quantity demanded rises 50→70. YED = +5/6 ≈ +0.83 — a normal good (necessity range).
- Cross-price elasticity: price of coffee rises $2→$3, quantity of tea demanded rises 100→120. XED = +5/11 ≈ +0.45 — substitutes.

Reminder: Quiz 5 is closed to AI (no chatbot help). Your Lecture Tutorial and the adaptive Discussion and Assignment do use your approved chatbot — Gemini, Claude, or ChatGPT.

See you in class Monday. Workshop 5 is the place to work through every calculation step by step.

~ Prof. Kessler

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