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 €5.00 to €6.50, weekly sales change from 1200 to 910. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €5.00P2 = €6.50Q1 = 1200Q2 = 910
E =
2.Price elasticity of demandHard
The demand for a product is Q = 2500 − 25P, with P in euros. Find the price elasticity of demand E at a price of €60.
Q = 2500 − 25PP = €60
E =
3.Economics conceptsMedium
A country has 950 employed people and 50 unemployed people seeking work. Its unemployment rate is:
- A5%
- B50%
- C5.3%
- D95%
4.Economics conceptsHard
According to the quantity theory of money (MV = PY), if velocity and real output are constant, a 5% rise in the money supply leads to:
- AAbout a 5% rise in the price level
- BNo change in prices
- CA 5% fall in velocity
- DAbout a 5% rise in real output
3Solutions
1.Price elasticity of demand
Answer: E = −1.054
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
(910 − 1200)/((1200 + 910)/2) = −290/1055 = −0.2749
Relative change in price
(6.5 − 5)/((5 + 6.5)/2) = 1.5/5.75 = 0.2609
Elasticity
E = −0.2749/0.2609 = −1.054
Answer
E = −1.054
2.Price elasticity of demand
Answer: E = −1.5
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 = 2500 − 25·60 = 1000
Point elasticity
dQ/dP = −25
E = (dQ/dP)·P/Q = −25·60/1000 = −1.5
Answer
E = −1.5
|E| > 1: demand is elastic.
3.Economics concepts
Answer: A · 5%
Why this is the answer
The labour force is 950 + 50 = 1,000, so the rate is 50 / 1,000 = 5%.
Answer
A · 5%
4.Economics concepts
Answer: A · About a 5% rise in the price level
Why this is the answer
With V and Y constant, M and P move proportionally, so prices rise about 5%. This is the classical view of money neutrality in the long run.
Answer
A · About a 5% rise in the price level
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