Economics · Grade 11 · Market Mechanics: Supply and Demand · Term 1

Elasticity of Demand

Students will calculate and interpret price elasticity of demand, understanding its implications for revenue and policy.

• Ontario Curriculum Expectations
• ON: The Individual and the Economy - Grade 11
• ON: Market Interactions - Grade 11

About This Topic

Market equilibrium is the point where the quantity demanded equals the quantity supplied. This topic explores how markets naturally move toward this balance and what happens when governments intervene with price controls. In Ontario, students analyze the impact of price ceilings, such as rent control, and price floors, like the minimum wage. They examine who benefits and who bears the costs of these policies, looking at outcomes like shortages and surpluses.

This topic is crucial for understanding current events in Canada, from housing affordability in Toronto to labor market debates. Students learn to evaluate the trade-offs of government intervention, considering both social equity and economic efficiency. Students grasp this concept faster through structured discussion and peer explanation of how 'black markets' or 'waitlists' emerge from price controls.

Key Questions

1. Explain why some goods have elastic demand while others are inelastic.
2. Analyze how elasticity affects a firm's pricing strategy.
3. Predict the revenue impact of a price change for goods with different elasticities.

Learning Objectives

• Calculate the price elasticity of demand for various goods and services using given price and quantity data.
• Explain the relationship between price elasticity of demand and a firm's total revenue, distinguishing between elastic, inelastic, and unit elastic scenarios.
• Analyze how the availability of substitutes, necessity versus luxury status, and proportion of income affect the elasticity of demand for a product.
• Evaluate the potential impact of government policies, such as taxes or subsidies, on consumer behavior and market outcomes based on demand elasticity.

Before You Start

Calculating Percentages

Why: Students need to be proficient in calculating percentage changes to accurately compute the price elasticity of demand.

Introduction to Supply and Demand

Why: Understanding the basic principles of how prices and quantities are determined in a market is foundational for analyzing how changes in price affect quantity demanded.

Calculating Total Revenue

Why: Students must know how to calculate total revenue to analyze its relationship with price changes and demand elasticity.

Key Vocabulary

Price Elasticity of Demand (PED)	A measure of how sensitive the quantity demanded of a good or service is to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
Elastic Demand	Demand where the percentage change in quantity demanded is greater than the percentage change in price (PED > 1). Consumers are highly responsive to price changes.
Inelastic Demand	Demand where the percentage change in quantity demanded is less than the percentage change in price (PED < 1). Consumers are not very responsive to price changes.
Unit Elastic Demand	Demand where the percentage change in quantity demanded is exactly equal to the percentage change in price (PED = 1). Total revenue remains unchanged when price changes.
Total Revenue	The total amount of money a firm receives from selling its goods or services. It is calculated by multiplying the price of a good by the quantity sold.

Watch Out for These Misconceptions

Common Misconception

Equilibrium is always 'fair'.

What to Teach Instead

Equilibrium is efficient, but it may result in prices that some people cannot afford. Using a simulation helps students see the difference between a market clearing and a social goal being met.

Common Misconception

Price ceilings are set above the equilibrium price.

What to Teach Instead

To be effective (binding), a ceiling must be set below equilibrium. A floor must be set above. Drawing these on a giant floor-grid helps students visualize where the 'barrier' sits.

Active Learning Ideas

Simulation Game: The Pit Market

Students are assigned roles as buyers and sellers with specific 'reservation prices.' They must negotiate trades in a chaotic 'pit' to find the market-clearing price through trial and error.

45 min·Whole Class

Formal Debate: Rent Control in Ontario

Divide the class into tenants, landlords, and city planners. They must debate the pros and cons of a strict rent ceiling, using supply and demand graphs to predict the long-term impact on housing quality.

50 min·Small Groups

Gallery Walk: Surpluses and Shortages

Display news headlines about the 'Great Canadian Maple Syrup Reserve' or 'Nursing Shortages.' Students move between stations to graph these scenarios and identify if they represent a floor or a ceiling.

30 min·Small Groups

Real-World Connections

• A gasoline company in a region like the Greater Toronto Area must consider the inelastic demand for fuel when setting prices. Even if prices rise, consumers still need to drive to work or school, leading to increased total revenue for the company.
• A new smartphone manufacturer launching a product in Canada will likely face elastic demand. With many competing brands and models available, a small price increase could lead to a significant drop in sales as consumers switch to alternatives.
• Governments consider the elasticity of demand when deciding to tax specific goods. For example, a tax on cigarettes, which have inelastic demand, is expected to generate substantial revenue and reduce consumption, while a tax on a luxury item with elastic demand might yield less revenue and significantly impact sales.

Assessment Ideas

Quick Check

Present students with a scenario: 'A local coffee shop increases the price of a latte from $4.00 to $4.50, and the number of lattes sold drops from 100 to 80.' Ask students to calculate the PED and state whether demand for lattes is elastic, inelastic, or unit elastic. Then, ask them to predict the impact on the coffee shop's total revenue.

Discussion Prompt

Facilitate a class discussion using the prompt: 'Imagine you are advising the CEO of a major airline. How would you explain the concept of price elasticity of demand and how it influences their decisions on ticket pricing for domestic flights within Canada? Consider factors like substitutes and the necessity of travel.'

Exit Ticket

Provide students with two products: 'prescription medication' and 'a specific brand of designer jeans.' Ask them to write one sentence for each product explaining why its demand is likely to be inelastic or elastic, respectively. They should also state one factor that supports their reasoning.

Frequently Asked Questions

What happens when there is a market shortage?

A shortage occurs when the price is below equilibrium, meaning quantity demanded exceeds quantity supplied. This usually leads to upward pressure on prices as buyers compete for the limited goods.

Is the minimum wage a price floor or a price ceiling?

The minimum wage is a price floor. It sets a legal minimum price for labor. If set above the equilibrium wage, it can lead to a surplus of labor, which is also known as unemployment.

How can active learning help students understand price controls?

Active learning, like a 'rent control' simulation, allows students to see the unintended consequences of policy. When 'landlords' in the simulation stop maintaining their properties because they can't raise rent, students understand the 'cost' of the ceiling in a way a textbook cannot convey.

Why do black markets form?

Black markets often emerge when price controls create persistent shortages. If people cannot buy a good legally at the capped price, they may turn to illegal markets where prices are higher but the good is available.