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 200 to 240. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €15.00P2 = €13.00Q1 = 200Q2 = 240
E =
2.Price elasticity of demandHard
The (inverse) demand for a product is P = 80 − 0.02Q, with P in euros. Find the price elasticity of demand E when 800 units are sold.
P = 80 − 0.02QQ = 800
E =
3.Economics conceptsMedium
A negative externality occurs when:
- AA firm makes a loss
- BThe government taxes a product
- CA third party bears a cost not paid by the producer or consumer
- DConsumers pay more for a product than it costs the firm to produce
4.Economics conceptsHard
A monopolist maximises profit where:
- ATotal revenue is at its maximum
- BAverage cost is at its minimum
- CPrice equals marginal cost
- DMarginal revenue equals marginal cost
3Solutions
1.Price elasticity of demand
Answer: E = −1.273
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
(240 − 200)/((200 + 240)/2) = 40/220 = 0.1818
Relative change in price
(13 − 15)/((15 + 13)/2) = −2/14 = −0.1429
Elasticity
E = 0.1818/−0.1429 = −1.273
Answer
E = −1.273
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 − 0.02·800 = €64.00
Point elasticity
dQ/dP = −1/0.02 = −50
E = −50·64/800 = −4
Answer
E = −4
|E| > 1: demand is elastic.
3.Economics concepts
Answer: C · A third party bears a cost not paid by the producer or consumer
Why this is the answer
Negative externalities lead to overproduction relative to the social optimum; Pigouvian taxes or tradeable permits can correct them.
Answer
C · A third party bears a cost not paid by the producer or consumer
4.Economics concepts
Answer: D · 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
D · Marginal revenue equals marginal cost
ExamProblems · examproblems.com/courses/microeconomics