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 €10.00 to €16.00, weekly sales change from 100 to 50. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €10.00P2 = €16.00Q1 = 100Q2 = 50
E =
2.Price elasticity of demandHard
The demand for a product is Q = 120 − 4P, with P in euros. Find the price elasticity of demand E at a price of €12.
Q = 120 − 4PP = €12
E =
3.Economics conceptsMedium
The income elasticity of demand for a good is -0.4. The good is:
- AA luxury good
- BAn inferior good
- CA normal necessity
- DA complement
4.Economics conceptsHard
According to the quantity theory of money (MV = PY), if velocity and real output are constant, a 5% rise in the money supply leads to:
- ANo change in prices
- BAbout a 5% rise in real output
- CA 5% fall in velocity
- DAbout a 5% rise in the price level
3Solutions
1.Price elasticity of demand
Answer: E = −1.444
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
(50 − 100)/((100 + 50)/2) = −50/75 = −0.6667
Relative change in price
(16 − 10)/((10 + 16)/2) = 6/13 = 0.4615
Elasticity
E = −0.6667/0.4615 = −1.444
Answer
E = −1.444
2.Price elasticity of demand
Answer: E = −0.6667
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 = 120 − 4·12 = 72
Point elasticity
dQ/dP = −4
E = (dQ/dP)·P/Q = −4·12/72 = −0.6667
Answer
E = −0.6667
|E| < 1: demand is inelastic.
3.Economics concepts
Answer: B · An inferior good
Why this is the answer
A negative income elasticity means demand falls as income rises, which defines an inferior good; luxuries have income elasticity above 1.
Answer
B · An inferior good
4.Economics concepts
Answer: D · About a 5% rise in the price level
Why this is the answer
With V and Y constant, M and P move proportionally, so prices rise about 5%. This is the classical view of money neutrality in the long run.
Answer
D · About a 5% rise in the price level
ExamProblems · examproblems.com/courses/microeconomics