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 €25.00 to €23.00, weekly sales change from 400 to 440. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €25.00P2 = €23.00Q1 = 400Q2 = 440
E =
2.Price elasticity of demandHard
The demand for a product is Q = 200 − 5P, with P in euros. Find the price elasticity of demand E at a price of €32.
Q = 200 − 5PP = €32
E =
3.Economics conceptsMedium
Comparative advantage means a country should specialise in goods it can produce:
- AAt a lower opportunity cost than other countries
- BWith the most workers
- COnly for its own consumption
- DMore cheaply in absolute terms than every other country
4.Economics conceptsHard
A monopolist maximises profit where:
- APrice equals marginal cost
- BMarginal revenue equals marginal cost
- CAverage cost is at its minimum
- DTotal revenue is at its maximum
3Solutions
1.Price elasticity of demand
Answer: E = −1.143
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
(440 − 400)/((400 + 440)/2) = 40/420 = 0.09524
Relative change in price
(23 − 25)/((25 + 23)/2) = −2/24 = −0.08333
Elasticity
E = 0.09524/−0.08333 = −1.143
Answer
E = −1.143
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 = 200 − 5·32 = 40
Point elasticity
dQ/dP = −5
E = (dQ/dP)·P/Q = −5·32/40 = −4
Answer
E = −4
|E| > 1: demand is elastic.
3.Economics concepts
Answer: A · 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
A · At a lower opportunity cost than other countries
4.Economics concepts
Answer: B · Marginal revenue equals marginal cost
Why this is the answer
Profit is maximised where MR = MC. For a monopolist, price is above MR, so P > MC, causing a deadweight loss.
Answer
B · Marginal revenue equals marginal cost
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