Week 5 — Elasticity

Why this matters

A transit planner weighing a bus fare and a café owner weighing a latte price both need to know whether buyers will barely react or walk away; that answer decides whether a price rise brings in more money or less.

In plain language

This week is about how strongly buyers react to a change. Week 3 told you which way buyers move when a price rises; this week measures how far. Economists call that strength the price elasticity of demand (a number that says how much buyers cut back, in percentage terms, for each percent the price goes up). When buyers react a lot, demand is elastic (stretchy); when they barely react, it is inelastic (stiff). You will also see why that number tells a seller whether a price rise brings in more money or less, and how the same idea measures responses to income and to the prices of other goods.

• Already covered: Week 3 built demand and its shifts; Week 4 added supply and found the market price.
• This week: price, income, and cross-price elasticities by the midpoint formula, and the total-revenue test.
• How they connect: each price elasticity measures a Week 3 movement along the demand curve.
• Where we're going next: Week 6, Consumer & Producer Surplus & Market Efficiency, measures who gains from a market.

Focus

How strongly do buyers respond to a price, and what does that mean for revenue?

By the end of this module, you should be able to:

• [ ] compute a price elasticity by the midpoint formula and label it
• [ ] explain why elasticity is not the slope
• [ ] use the total-revenue test on a price change
• [ ] read the sign of an income or cross-price elasticity

To-do

Plan your week

1. Read Chapter 5 (40–50 minutes), then the lecture and slides.
2. Work the tutorial (60–90 minutes) and practice set (15–25 minutes).
3. Do the Model Workshop (90 minutes), discussion, and assignment.
4. Take the quiz.

This week's checkpoint: say whether raising the price from 6 to 8 dollars on the elasticity schedule raises or lowers revenue, and why.

You've got this

Take it in order, and ask your instructor early.

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