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 €27.00, weekly sales change from 800 to 720. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €25.00P2 = €27.00Q1 = 800Q2 = 720
E =
2.Price elasticity of demandHard
The demand for a product is Q = 400 − 5P, with P in euros. Find the price elasticity of demand E at a price of €32.
Q = 400 − 5PP = €32
E =
3.Economics conceptsMedium
Stagflation is a combination of:
- AHigh growth and falling prices
- BLow inflation and low unemployment
- CDeflation and rapid growth
- DHigh inflation and high unemployment with low growth
4.Economics conceptsHard
Okun's law describes:
- AThe relationship between tax rates and revenue
- BA positive relationship between inflation and nominal interest rates over time
- CThe link between money supply and prices
- DA negative relationship between output growth and changes in unemployment
3Solutions
1.Price elasticity of demand
Answer: E = −1.368
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
(720 − 800)/((800 + 720)/2) = −80/760 = −0.1053
Relative change in price
(27 − 25)/((25 + 27)/2) = 2/26 = 0.07692
Elasticity
E = −0.1053/0.07692 = −1.368
Answer
E = −1.368
2.Price elasticity of demand
Answer: E = −0.6667
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 = 400 − 5·32 = 240
Point elasticity
dQ/dP = −5
E = (dQ/dP)·P/Q = −5·32/240 = −0.6667
Answer
E = −0.6667
|E| < 1: demand is inelastic.
3.Economics concepts
Answer: D · High inflation and high unemployment with low growth
Why this is the answer
Stagflation combines stagnant output, rising unemployment and high inflation, usually after supply shocks.
Answer
D · High inflation and high unemployment with low growth
4.Economics concepts
Answer: D · A negative relationship between output growth and changes in unemployment
Why this is the answer
Okun observed that unemployment falls when real GDP grows faster than its trend rate and rises when growth is below trend.
Answer
D · A negative relationship between output growth and changes in unemployment
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