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 €8.00 to €5.50, weekly sales change from 800 to 900. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €8.00P2 = €5.50Q1 = 800Q2 = 900
E =
2.Price elasticity of demandHard
The demand for a product is Q = 750 − 25P, with P in euros. Find the price elasticity of demand E at a price of €24.
Q = 750 − 25PP = €24
E =
3.Economics conceptsMedium
Comparative advantage means a country should specialise in goods it can produce:
- AMore cheaply in absolute terms than every other country
- BOnly for its own consumption
- CAt a lower opportunity cost than other countries
- DWith the most workers
4.Economics conceptsHard
The "convergence hypothesis" from the Solow model predicts that:
- ARich countries always grow faster than poor ones, because they have more capital
- BPoorer countries with similar fundamentals tend to grow faster than richer ones
- CAll countries will eventually have the same population
- DExchange rates converge to a fixed value
3Solutions
1.Price elasticity of demand
Answer: E = −0.3176
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
(900 − 800)/((800 + 900)/2) = 100/850 = 0.1176
Relative change in price
(5.5 − 8)/((8 + 5.5)/2) = −2.5/6.75 = −0.3704
Elasticity
E = 0.1176/−0.3704 = −0.3176
Answer
E = −0.3176
2.Price elasticity of demand
Answer: E = −4
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 = 750 − 25·24 = 150
Point elasticity
dQ/dP = −25
E = (dQ/dP)·P/Q = −25·24/150 = −4
Answer
E = −4
|E| > 1: demand is elastic.
3.Economics concepts
Answer: C · At a lower opportunity cost than other countries
Why this is the answer
Even a country that is less efficient at everything gains from trade by specialising where its opportunity cost is lowest.
Answer
C · At a lower opportunity cost than other countries
4.Economics concepts
Answer: B · Poorer countries with similar fundamentals tend to grow faster than richer ones
Why this is the answer
Capital-poor economies have higher returns to investment, so, given similar saving rates and technology, they should catch up (conditional convergence).
Answer
B · Poorer countries with similar fundamentals tend to grow faster than richer ones
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