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 €15.00 to €13.00, weekly sales change from 400 to 460. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €15.00P2 = €13.00Q1 = 400Q2 = 460
E =
2.Price elasticity of demandHard
The (inverse) demand for a product is P = 80 − 0.05Q, with P in euros. Find the price elasticity of demand E when 320 units are sold.
P = 80 − 0.05QQ = 320
E =
3.Economics conceptsMedium
Rising consumer confidence would most likely:
- AHave no effect on the economy
- BShift aggregate supply to the left
- CShift aggregate demand to the left
- DShift aggregate demand to the right
4.Economics conceptsHard
In the Mundell–Fleming model with perfect capital mobility and a floating exchange rate:
- ABoth policies have no effect on output
- BBoth policies are equally effective
- CMonetary policy is effective but fiscal policy is largely ineffective
- DFiscal policy is effective, but monetary policy is largely ineffective
3Solutions
1.Price elasticity of demand
Answer: E = −0.9767
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
(460 − 400)/((400 + 460)/2) = 60/430 = 0.1395
Relative change in price
(13 − 15)/((15 + 13)/2) = −2/14 = −0.1429
Elasticity
E = 0.1395/−0.1429 = −0.9767
Answer
E = −0.9767
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.
Price at this quantity
P = 80 − 0.05·320 = €64.00
Point elasticity
dQ/dP = −1/0.05 = −20
E = −20·64/320 = −4
Answer
E = −4
|E| > 1: demand is elastic.
3.Economics concepts
Answer: D · Shift aggregate demand to the right
Why this is the answer
Higher confidence raises consumption at every price level, shifting AD right and raising output and, possibly, prices in the short run.
Answer
D · Shift aggregate demand to the right
4.Economics concepts
Answer: C · Monetary policy is effective but fiscal policy is largely ineffective
Why this is the answer
Under floating rates, fiscal expansion causes appreciation that crowds out net exports, while monetary expansion causes depreciation that boosts output; under fixed rates the result is reversed.
Answer
C · Monetary policy is effective but fiscal policy is largely ineffective
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