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 €4.00 to €5.00, weekly sales change from 200 to 120. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €4.00P2 = €5.00Q1 = 200Q2 = 120
E =
2.Price elasticity of demandHard
Demand for a product has a constant price elasticity of −3, so Q = A·P^−3. At a price of €20, 10 000 units are sold. How many units Q are sold at a price of €24.00?
E = −3P1 = €20Q1 = 10 000P2 = €24.00
Q = units
3.Economics conceptsMedium
A sharp rise in world oil prices leading to higher inflation is an example of:
- ADemand-pull inflation
- BDeflation
- CCost-push inflation
- DDisinflation
4.Economics conceptsHard
A monopolist maximises profit where:
- APrice equals marginal cost
- BTotal revenue is at its maximum
- CMarginal revenue equals marginal cost
- DAverage cost is at its minimum
3Solutions
1.Price elasticity of demand
Answer: E = −2.25
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
(120 − 200)/((200 + 120)/2) = −80/160 = −0.5
Relative change in price
(5 − 4)/((4 + 5)/2) = 1/4.5 = 0.2222
Elasticity
E = −0.5/0.2222 = −2.25
Answer
E = −2.25
2.Price elasticity of demand
Answer: Q = 5787 units
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.
Ratio of the prices
P2/P1 = 24/20 = 1.2
New quantity
Q = 10 000·1.2−3 = 10 000·0.5787 = 5787
Answer
Q = 5787
3.Economics concepts
Answer: C · Cost-push inflation
Why this is the answer
Higher input costs shift aggregate supply to the left, raising prices and possibly lowering output; demand-pull inflation comes from excess aggregate demand.
Answer
C · Cost-push inflation
4.Economics concepts
Answer: C · 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
C · Marginal revenue equals marginal cost
ExamProblems · examproblems.com/courses/microeconomics