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 €3.00, weekly sales change from 1000 to 1200. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €4.00P2 = €3.00Q1 = 1000Q2 = 1200
E =
2.Price elasticity of demandHard
The demand for a product is Q = 640 − 8P, with P in euros. Find the price elasticity of demand E at a price of €64.
Q = 640 − 8PP = €64
E =
3.Economics conceptsMedium
A country has 950 employed people and 50 unemployed people seeking work. Its unemployment rate is:
- A50%
- B5.3%
- C5%
- D95%
4.Economics conceptsHard
A deadweight loss represents:
- AThe loss of total surplus when output differs from the efficient level
- BThe tax revenue collected by the government
- CThe profit of a monopolist
- DLosses made by firms that are forced to leave the market in the long run
3Solutions
1.Price elasticity of demand
Answer: E = −0.6364
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
(1200 − 1000)/((1000 + 1200)/2) = 200/1100 = 0.1818
Relative change in price
(3 − 4)/((4 + 3)/2) = −1/3.5 = −0.2857
Elasticity
E = 0.1818/−0.2857 = −0.6364
Answer
E = −0.6364
2.Price elasticity of demand
Answer: E = −4
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 = 640 − 8·64 = 128
Point elasticity
dQ/dP = −8
E = (dQ/dP)·P/Q = −8·64/128 = −4
Answer
E = −4
|E| > 1: demand is elastic.
3.Economics concepts
Answer: C · 5%
Why this is the answer
The labour force is 950 + 50 = 1,000, so the rate is 50 / 1,000 = 5%.
Answer
C · 5%
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
ExamProblems · examproblems.com/courses/microeconomics