Price elasticity of demand
- Price elasticity (midpoint)
- E = (ΔQ/Q̄)/(ΔP/P̄)
- Elastic / inelastic
- |E| > 1 elastic, |E| < 1 inelastic
- Revenue
- TR = P·Q
Microeconomics: cram pack
Formula sheets, the key method steps for every topic and 4 practice problems, with full solutions at the back.
1Formulas and methods
2Practice problems
1.Price elasticity of demandMedium
When the price of a ticket changes from €40.00 to €38.00, weekly sales change from 500 to 540. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €40.00P2 = €38.00Q1 = 500Q2 = 540
E =
2.Price elasticity of demandHard
The demand for a product is Q = 1200 − 20P, with P in euros. Find the price elasticity of demand E at a price of €45.
Q = 1200 − 20PP = €45
E =
3.Economics conceptsMedium
A currency depreciation tends to:
- AMake imports cheaper
- BMake exports cheaper abroad and imports more expensive
- CReduce the price of all domestic goods and make imports cheaper
- DHave no effect on trade
4.Economics conceptsHard
For a normal good, when its price falls, the substitution effect and income effect:
- ACancel out exactly
- BBoth increase the quantity demanded
- CWork in opposite directions
- DBoth decrease the quantity demanded
3Solutions
1.Price elasticity of demand
Answer: E = −1.5
Price elasticity of demand measures how strongly the quantity demanded reacts to price: E = (% change in quantity)/(% change in price). It is negative for normal goods. |E| > 1 is elastic (revenue falls when price rises), |E| < 1 is inelastic.
Relative change in quantity
(540 − 500)/((500 + 540)/2) = 40/520 = 0.07692
Relative change in price
(38 − 40)/((40 + 38)/2) = −2/39 = −0.05128
Elasticity
E = 0.07692/−0.05128 = −1.5
Answer
E = −1.5
2.Price elasticity of demand
Answer: E = −3
Price elasticity of demand measures how strongly the quantity demanded reacts to price: E = (% change in quantity)/(% change in price). It is negative for normal goods. |E| > 1 is elastic (revenue falls when price rises), |E| < 1 is inelastic.
Quantity at this price
Q = 1200 − 20·45 = 300
Point elasticity
dQ/dP = −20
E = (dQ/dP)·P/Q = −20·45/300 = −3
Answer
E = −3
|E| > 1: demand is elastic.
3.Economics concepts
Answer: B · Make exports cheaper abroad and imports more expensive
Why this is the answer
A weaker currency improves export competitiveness and raises import prices, which can increase inflation.
Answer
B · Make exports cheaper abroad and imports more expensive
4.Economics concepts
Answer: B · Both increase the quantity demanded
Why this is the answer
The substitution effect always favours the cheaper good, and for a normal good the higher real income also raises demand, so both effects reinforce each other.
Answer
B · Both increase the quantity demanded
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