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 €12.00 to €2.00, weekly sales change from 1000 to 1500. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €12.00P2 = €2.00Q1 = 1000Q2 = 1500
E =
2.Price elasticity of demandHard
The demand for a product is Q = 1000 − 50P, with P in euros. Find the price elasticity of demand E at a price of €16.
Q = 1000 − 50PP = €16
E =
3.Economics conceptsMedium
A sharp rise in world oil prices leading to higher inflation is an example of:
- ADeflation
- BDisinflation
- CCost-push inflation
- DDemand-pull inflation
4.Economics conceptsHard
The principal–agent problem arises when:
- ATwo firms agree to fix prices
- BAn agent acting for a principal has different goals and the principal cannot fully monitor them
- CA buyer and seller have identical information
- DThe government owns a firm
3Solutions
1.Price elasticity of demand
Answer: E = −0.28
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
(1500 − 1000)/((1000 + 1500)/2) = 500/1250 = 0.4
Relative change in price
(2 − 12)/((12 + 2)/2) = −10/7 = −1.429
Elasticity
E = 0.4/−1.429 = −0.28
Answer
E = −0.28
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 = 1000 − 50·16 = 200
Point elasticity
dQ/dP = −50
E = (dQ/dP)·P/Q = −50·16/200 = −4
Answer
E = −4
|E| > 1: demand is elastic.
3.Economics concepts
Answer: C · Cost-push inflation
Why this is the answer
Higher input costs shift aggregate supply to the left, raising prices and possibly lowering output; demand-pull inflation comes from excess aggregate demand.
Answer
C · Cost-push inflation
4.Economics concepts
Answer: B · An agent acting for a principal has different goals and the principal cannot fully monitor them
Why this is the answer
Hidden action and conflicting interests let the agent pursue their own aims; incentive contracts such as performance pay try to align interests.
Answer
B · An agent acting for a principal has different goals and the principal cannot fully monitor them
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