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 €19.00, weekly sales change from 200 to 180. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €15.00P2 = €19.00Q1 = 200Q2 = 180
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 €24.
Q = 400 − 5PP = €24
E =
3.Economics conceptsMedium
A price ceiling set below the equilibrium price typically causes:
- AAn increase in supply
- BA surplus
- CA shortage
- DNo change in the market
4.Economics conceptsHard
The Phillips curve originally suggested:
- AThat inflation and unemployment always rise and fall together in the short run
- BThat unemployment has no link to inflation
- CThat higher taxes always reduce inflation
- DA trade-off between inflation and unemployment in the short run
3Solutions
1.Price elasticity of demand
Answer: E = −0.4474
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
(180 − 200)/((200 + 180)/2) = −20/190 = −0.1053
Relative change in price
(19 − 15)/((15 + 19)/2) = 4/17 = 0.2353
Elasticity
E = −0.1053/0.2353 = −0.4474
Answer
E = −0.4474
2.Price elasticity of demand
Answer: E = −0.4286
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 − 5·24 = 280
Point elasticity
dQ/dP = −5
E = (dQ/dP)·P/Q = −5·24/280 = −0.4286
Answer
E = −0.4286
|E| < 1: demand is inelastic.
3.Economics concepts
Answer: C · A shortage
Why this is the answer
A binding maximum price raises quantity demanded and lowers quantity supplied, creating excess demand, as with rent control.
Answer
C · A shortage
4.Economics concepts
Answer: D · A trade-off between inflation and unemployment in the short run
Why this is the answer
Phillips found an inverse relationship between wage inflation and unemployment; expectations-augmented versions show no long-run trade-off at the natural rate.
Answer
D · A trade-off between inflation and unemployment in the short run
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