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 €16.00, weekly sales change from 100 to 120. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €20.00P2 = €16.00Q1 = 100Q2 = 120
E =
2.Price elasticity of demandHard
The demand for a product is Q = 800 − 10P, with P in euros. Find the price elasticity of demand E at a price of €56.
Q = 800 − 10PP = €56
E =
3.Economics conceptsMedium
The marginal propensity to consume is:
- AThe total consumption in an economy
- BThe interest rate on consumer loans
- CThe share of an extra euro of income that is spent on consumption
- DThe average share of total income that households save over a year
4.Economics conceptsHard
The Marshall–Lerner condition states that a currency depreciation improves the trade balance if:
- AThe sum of the price elasticities of demand for exports and imports exceeds 1
- BThe country has a budget surplus
- CExports and imports have zero price elasticity
- DInterest rates rise at the same time
3Solutions
1.Price elasticity of demand
Answer: E = −0.8182
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
(120 − 100)/((100 + 120)/2) = 20/110 = 0.1818
Relative change in price
(16 − 20)/((20 + 16)/2) = −4/18 = −0.2222
Elasticity
E = 0.1818/−0.2222 = −0.8182
Answer
E = −0.8182
2.Price elasticity of demand
Answer: E = −2.333
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 = 800 − 10·56 = 240
Point elasticity
dQ/dP = −10
E = (dQ/dP)·P/Q = −10·56/240 = −2.333
Answer
E = −2.333
|E| > 1: demand is elastic.
3.Economics concepts
Answer: C · The share of an extra euro of income that is spent on consumption
Why this is the answer
The MPC measures how consumption changes with income; it determines the size of the Keynesian multiplier, 1/(1 − MPC).
Answer
C · The share of an extra euro of income that is spent on consumption
4.Economics concepts
Answer: A · 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
A · The sum of the price elasticities of demand for exports and imports exceeds 1
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