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 €25.00 to €23.00, weekly sales change from 200 to 230. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €25.00P2 = €23.00Q1 = 200Q2 = 230
E =
2.Price elasticity of demandHard
Demand for a product has a constant price elasticity of −0.8, so Q = A·P^−0.8. At a price of €20, 2 000 units are sold. How many units Q are sold at a price of €14.00?
E = −0.8P1 = €20Q1 = 2 000P2 = €14.00
Q = units
3.Economics conceptsMedium
Crowding out refers to:
- AOvercrowded public services
- BToo many firms entering a market
- CHigher government borrowing raising interest rates and reducing private investment
- DImports replacing domestic production
4.Economics conceptsHard
In the Bertrand model, two firms sell identical products with the same constant marginal cost and compete on price. The equilibrium price is:
- AZero
- BThe monopoly price
- CHalfway between monopoly price and marginal cost
- DEqual to marginal cost
3Solutions
1.Price elasticity of demand
Answer: E = −1.674
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
(230 − 200)/((200 + 230)/2) = 30/215 = 0.1395
Relative change in price
(23 − 25)/((25 + 23)/2) = −2/24 = −0.08333
Elasticity
E = 0.1395/−0.08333 = −1.674
Answer
E = −1.674
2.Price elasticity of demand
Answer: Q = 2660 units
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.
Ratio of the prices
P2/P1 = 14/20 = 0.7
New quantity
Q = 2 000·0.7−0.8 = 2 000·1.33 = 2660
Answer
Q = 2660
3.Economics concepts
Answer: C · Higher government borrowing raising interest rates and reducing private investment
Why this is the answer
When government borrowing raises interest rates, some private investment is no longer profitable, reducing the net effect of fiscal expansion.
Answer
C · Higher government borrowing raising interest rates and reducing private investment
4.Economics concepts
Answer: D · Equal to marginal cost
Why this is the answer
Undercutting continues until price equals marginal cost, so even two firms reach the competitive outcome; in Cournot quantity competition, price stays above MC.
Answer
D · Equal to marginal cost
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