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
A product sells 1 000 units per month at €20. Its price elasticity of demand is −1.5. The firm changes the price by +15%. Assuming %ΔQ = E·%ΔP, by how much ΔR does monthly revenue change?
P1 = €20Q1 = 1 000E = −1.5%ΔP = +15%
ΔR = €
2.Price elasticity of demandHard
The demand for a product is Q = 300 − 5P, with P in euros. Find the price elasticity of demand E at a price of €48.
Q = 300 − 5PP = €48
E =
3.Economics conceptsMedium
If the ECB raises its main interest rate, the most likely short-term effect is:
- AAn immediate rise in GDP
- BA fall in the value of the euro
- CHigher borrowing and spending, which adds to inflationary pressure
- DLower borrowing and spending, reducing inflationary pressure
4.Economics conceptsHard
In the Solow growth model, sustained long-run growth in output per worker comes from:
- APopulation growth
- BA higher saving rate alone
- CTechnological progress
- DGovernment budget deficits
3Solutions
1.Price elasticity of demand
Answer: ΔR = −2175 €
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.
New price and quantity
P2 = 20·1.15 = €23.00
Q2 = 1 000·0.775 = 775
Change in revenue
ΔR = 23·775 − 20·1 000 = 17 825.00 − 20 000 = −€2 175.00
Answer
ΔR = −€2 175.00
|E| > 1: demand is elastic.
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 = 300 − 5·48 = 60
Point elasticity
dQ/dP = −5
E = (dQ/dP)·P/Q = −5·48/60 = −4
Answer
E = −4
|E| > 1: demand is elastic.
3.Economics concepts
Answer: D · Lower borrowing and spending, reducing inflationary pressure
Why this is the answer
Higher rates make credit more expensive and saving more attractive, reducing demand and inflation; they also tend to strengthen the currency.
Answer
D · Lower borrowing and spending, reducing inflationary pressure
4.Economics concepts
Answer: C · Technological progress
Why this is the answer
A higher saving rate raises the steady-state level of output per worker but not its long-run growth rate; only technological progress produces continuous growth.
Answer
C · Technological progress
ExamProblems · examproblems.com/courses/microeconomics