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 €10.00 to €6.00, weekly sales change from 800 to 930. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €10.00P2 = €6.00Q1 = 800Q2 = 930
E =
2.Price elasticity of demandHard
Demand for a product has a constant price elasticity of −1.5, so Q = A·P^−1.5. At a price of €4, 2 000 units are sold. How many units Q are sold at a price of €5.60?
E = −1.5P1 = €4Q1 = 2 000P2 = €5.60
Q = units
3.Economics conceptsMedium
A country has 950 employed people and 50 unemployed people seeking work. Its unemployment rate is:
- A5.3%
- B5%
- C50%
- D95%
4.Economics conceptsHard
Moral hazard arises when:
- AOne party changes behaviour after a contract because they do not bear the full consequences
- BPrices are too high for poor consumers
- CA buyer cannot observe product quality before buying, so low-quality sellers dominate the market
- DTwo firms collude on price
3Solutions
1.Price elasticity of demand
Answer: E = −0.3006
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
(930 − 800)/((800 + 930)/2) = 130/865 = 0.1503
Relative change in price
(6 − 10)/((10 + 6)/2) = −4/8 = −0.5
Elasticity
E = 0.1503/−0.5 = −0.3006
Answer
E = −0.3006
2.Price elasticity of demand
Answer: Q = 1207 units
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.
Ratio of the prices
P2/P1 = 5.6/4 = 1.4
New quantity
Q = 2 000·1.4−1.5 = 2 000·0.6037 = 1207
Answer
Q = 1207
3.Economics concepts
Answer: B · 5%
Why this is the answer
The labour force is 950 + 50 = 1,000, so the rate is 50 / 1,000 = 5%.
Answer
B · 5%
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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