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 €12.00 to €10.00, weekly sales change from 1200 to 1520. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €12.00P2 = €10.00Q1 = 1200Q2 = 1520
E =
2.Price elasticity of demandHard
The demand for a product is Q = 60 − 2P, with P in euros. Find the price elasticity of demand E at a price of €9.
Q = 60 − 2PP = €9
E =
3.Economics conceptsMedium
Rising consumer confidence would most likely:
- AShift aggregate demand to the left
- BShift aggregate supply to the left
- CShift aggregate demand to the right
- DHave no effect on the economy
4.Economics conceptsHard
Under perfect (first-degree) price discrimination, the monopolist:
- ACreates the largest possible deadweight loss
- BCaptures all consumer surplus and produces the efficient output
- CProduces less than a single-price monopolist, creating a larger deadweight loss
- DCharges every consumer the same price
3Solutions
1.Price elasticity of demand
Answer: E = −1.294
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
(1520 − 1200)/((1200 + 1520)/2) = 320/1360 = 0.2353
Relative change in price
(10 − 12)/((12 + 10)/2) = −2/11 = −0.1818
Elasticity
E = 0.2353/−0.1818 = −1.294
Answer
E = −1.294
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 = 60 − 2·9 = 42
Point elasticity
dQ/dP = −2
E = (dQ/dP)·P/Q = −2·9/42 = −0.4286
Answer
E = −0.4286
|E| < 1: demand is inelastic.
3.Economics concepts
Answer: C · Shift aggregate demand to the right
Why this is the answer
Higher confidence raises consumption at every price level, shifting AD right and raising output and, possibly, prices in the short run.
Answer
C · Shift aggregate demand to the right
4.Economics concepts
Answer: B · Captures all consumer surplus and produces the efficient output
Why this is the answer
Charging each buyer their reservation price means it sells until price equals MC, so there is no deadweight loss, but all surplus goes to the producer.
Answer
B · Captures all consumer surplus and produces the efficient output
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