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 €23.00, weekly sales change from 1000 to 1030. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €25.00P2 = €23.00Q1 = 1000Q2 = 1030
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 €32.
Q = 800 − 10PP = €32
E =
3.Economics conceptsMedium
A per-unit tax is placed on a good with very inelastic demand and elastic supply. Who bears most of the tax burden?
- AProducers
- BThe government
- CIt is always split equally
- DConsumers
4.Economics conceptsHard
Okun's law describes:
- AA negative relationship between output growth and changes in unemployment
- BThe relationship between tax rates and revenue
- CThe link between money supply and prices
- DA positive relationship between inflation and nominal interest rates over time
3Solutions
1.Price elasticity of demand
Answer: E = −0.3547
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
(1030 − 1000)/((1000 + 1030)/2) = 30/1015 = 0.02956
Relative change in price
(23 − 25)/((25 + 23)/2) = −2/24 = −0.08333
Elasticity
E = 0.02956/−0.08333 = −0.3547
Answer
E = −0.3547
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 = 800 − 10·32 = 480
Point elasticity
dQ/dP = −10
E = (dQ/dP)·P/Q = −10·32/480 = −0.6667
Answer
E = −0.6667
|E| < 1: demand is inelastic.
3.Economics concepts
Answer: D · Consumers
Why this is the answer
The tax burden falls mainly on the side of the market that is less elastic; here buyers cannot cut back, so the price they pay rises by most of the tax.
Answer
D · Consumers
4.Economics concepts
Answer: A · 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
A · A negative relationship between output growth and changes in unemployment
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