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 2 500 units per month at €5. Its price elasticity of demand is −0.4. The firm changes the price by −20%. Assuming %ΔQ = E·%ΔP, by how much ΔR does monthly revenue change?
P1 = €5Q1 = 2 500E = −0.4%ΔP = −20%
ΔR = €
2.Price elasticity of demandHard
The demand for a product is Q = 80 − 2P, with P in euros. Find the price elasticity of demand E at a price of €24.
Q = 80 − 2PP = €24
E =
3.Economics conceptsMedium
A currency depreciation tends to:
- AMake imports cheaper
- BMake exports cheaper abroad and imports more expensive
- CHave no effect on trade
- DReduce the price of all domestic goods and make imports cheaper
4.Economics conceptsHard
A deadweight loss represents:
- AThe loss of total surplus when output differs from the efficient level
- BThe profit of a monopolist
- CLosses made by firms that are forced to leave the market in the long run
- DThe tax revenue collected by the government
3Solutions
1.Price elasticity of demand
Answer: ΔR = −1700 €
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 = 5·0.8 = €4.00
Q2 = 2 500·1.08 = 2700
Change in revenue
ΔR = 4·2700 − 5·2 500 = 10 800.00 − 12 500 = −€1 700.00
Answer
ΔR = −€1 700.00
|E| < 1: demand is inelastic.
2.Price elasticity of demand
Answer: E = −1.5
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 = 80 − 2·24 = 32
Point elasticity
dQ/dP = −2
E = (dQ/dP)·P/Q = −2·24/32 = −1.5
Answer
E = −1.5
|E| > 1: demand is elastic.
3.Economics concepts
Answer: B · Make exports cheaper abroad and imports more expensive
Why this is the answer
A weaker currency improves export competitiveness and raises import prices, which can increase inflation.
Answer
B · Make exports cheaper abroad and imports more expensive
4.Economics concepts
Answer: A · The loss of total surplus when output differs from the efficient level
Why this is the answer
Deadweight loss is the reduction in combined consumer and producer surplus caused by distortions such as taxes, monopoly or price controls.
Answer
A · The loss of total surplus when output differs from the efficient level
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