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 €20.00 to €10.00, weekly sales change from 800 to 960. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €20.00P2 = €10.00Q1 = 800Q2 = 960
E =
2.Price elasticity of demandHard
The demand for a product is Q = 250 − 5P, with P in euros. At which price P is the price elasticity of demand equal to −2?
Q = 250 − 5PE = −2
P = €
3.Economics conceptsMedium
Stagflation is a combination of:
- AHigh inflation and high unemployment with low growth
- BLow inflation and low unemployment
- CDeflation and rapid growth
- DHigh growth and falling prices
4.Economics conceptsHard
The Marshall–Lerner condition states that a currency depreciation improves the trade balance if:
- AExports and imports have zero price elasticity
- BInterest rates rise at the same time
- CThe country has a budget surplus
- DThe sum of the price elasticities of demand for exports and imports exceeds 1
3Solutions
1.Price elasticity of demand
Answer: E = −0.2727
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
(960 − 800)/((800 + 960)/2) = 160/880 = 0.1818
Relative change in price
(10 − 20)/((20 + 10)/2) = −10/15 = −0.6667
Elasticity
E = 0.1818/−0.6667 = −0.2727
Answer
E = −0.2727
2.Price elasticity of demand
Answer: P = 33.33 €
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 = −5P/(250 − 5P)
Solve for P
−5P = −2·(250 − 5P)
P·(−5 − 10) = −500 → P = €33.33
Answer
P = €33.33
Check: Q = 83.33, E = −5·33.33/83.33 = −2.
3.Economics concepts
Answer: A · High inflation and high unemployment with low growth
Why this is the answer
Stagflation combines stagnant output, rising unemployment and high inflation, usually after supply shocks.
Answer
A · High inflation and high unemployment with low growth
4.Economics concepts
Answer: D · The sum of the price elasticities of demand for exports and imports exceeds 1
Why this is the answer
If export and import demand are elastic enough (absolute values summing to more than 1), volume effects outweigh the higher import prices and the balance improves.
Answer
D · The sum of the price elasticities of demand for exports and imports exceeds 1
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