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Teaching notes · lesson 16 · a 20-minute class

Price elasticity, with a worked example

Work out an elasticity from two prices and two volumes, then what it does to profit. Tracks: Pricing, Finance.

Open the lesson

Learning goalsBy the end, students can

  • Work out an elasticity from two prices and two volumes.
  • Work out what a price change does to sales value.
  • Check a price change against gross profit break-even before making it.

The 20-minute classMinute by minute, with the lab on the projector

  1. 0:003 min, to 3:00

    Cold open

    Write two prices and two weekly volumes on the board. Ask the room to work out the elasticity before you explain anything.

  2. 3:004 min, to 7:00

    The idea

    Work the four steps on the board: the two periods, the ratio, sales value, gross profit.

  3. 7:005 min, to 12:00

    Lab on the projector

    Pick a 5% rise. Follow the lab's steps: volume falls 8.4%, elasticity about −1.7, gross profit about 3% lower.

  4. 12:003 min, to 15:00

    Pairs

    Pairs work the three lesson questions on paper before checking.

  5. 15:003 min, to 18:00

    Discussion

    Take the published averages question: why is your number not the textbook's?

  6. 18:002 min, to 20:00

    Check

    Exit ticket: one elasticity, worked out, with sales value and the profit answer.

Discussion questionsWith what a strong answer covers

  1. Why might your brand's elasticity differ from the published averages?

    A strong answer covers
    • Averages pool many brands and categories.
    • A strong brand has a lower elasticity.
    • Frequent deals raise measured elasticity.

  2. How do you tell, before changing price, whether a rise will cost gross profit?

    A strong answer covers
    • Work out the volume you can lose before profit falls.
    • Compare it with the volume you expect to lose.
    • Gross profit is units times gross profit per unit.

  3. Why can the first quarter and the full year give different elasticities?

    A strong answer covers
    • Habit stretches the response over several quarters.
    • So the first quarter understates the settled effect.
    • Measure over the same length of time before and after.

The lab as homeworkAbout 15 minutes for a student

Use the lab to work through a price cut step by step.

  1. Pick a price cut in the lab.
  2. Note the change in volume, sales value and gross profit.
  3. Work out the elasticity yourself and check it against the lab.

They answer: For the cut you chose, what was the elasticity, what happened to sales value and gross profit, and was the cut worth it?

A strong answer covers
  • Shows the working: % volume change divided by % price change.
  • Quotes sales value and gross profit from the lab.
  • Judges the cut on gross profit, not volume.

Students also answer the lesson's three questions. Their score is worked out on the server from their answers.

Set this lab as homework

Students open a link, do the lab, answer the three questions and write what they found. You see each student's quiz score and finding on your class page.

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