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 500 to 560. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €25.00P2 = €23.00Q1 = 500Q2 = 560
E =
2.Price elasticity of demandHard
The demand for a product is Q = 1000 − 20P, with P in euros. At which price P is the price elasticity of demand equal to −4?
Q = 1000 − 20PE = −4
P = €
3.Economics conceptsMedium
The principle of diminishing marginal utility states that:
- AExtra satisfaction from each additional unit consumed tends to fall
- BTotal satisfaction falls with each additional unit of the good that is consumed
- CConsumers always prefer more expensive goods
- DSatisfaction rises as income falls
4.Economics conceptsHard
Moral hazard arises when:
- AOne party changes behaviour after a contract because they do not bear the full consequences
- BA buyer cannot observe product quality before buying, so low-quality sellers dominate the market
- CTwo firms collude on price
- DPrices are too high for poor consumers
3Solutions
1.Price elasticity of demand
Answer: E = −1.358
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
(560 − 500)/((500 + 560)/2) = 60/530 = 0.1132
Relative change in price
(23 − 25)/((25 + 23)/2) = −2/24 = −0.08333
Elasticity
E = 0.1132/−0.08333 = −1.358
Answer
E = −1.358
2.Price elasticity of demand
Answer: P = 40 €
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.
Elasticity as a function of price
E = −20P/(1000 − 20P)
Solve for P
−20P = −4·(1000 − 20P)
P·(−20 − 80) = −4000 → P = €40.00
Answer
P = €40.00
Check: Q = 200, E = −20·40/200 = −4.
3.Economics concepts
Answer: A · Extra satisfaction from each additional unit consumed tends to fall
Why this is the answer
As consumption of a good increases, the marginal utility of each extra unit usually declines, which helps explain downward-sloping demand.
Answer
A · Extra satisfaction from each additional unit consumed tends to fall
4.Economics concepts
Answer: A · One party changes behaviour after a contract because they do not bear the full consequences
Why this is the answer
Moral hazard is hidden action after the contract, such as an insured driver taking more risks. Adverse selection is hidden information before the contract.
Answer
A · One party changes behaviour after a contract because they do not bear the full consequences
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