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 €8.00 to €7.50, weekly sales change from 200 to 230. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €8.00P2 = €7.50Q1 = 200Q2 = 230
E =
2.Price elasticity of demandHard
The demand for a product is Q = 2000 − 20P, with P in euros. Find the price elasticity of demand E at a price of €30.
Q = 2000 − 20PP = €30
E =
3.Economics conceptsMedium
In an oligopoly, firms are typically:
- AMany and too small to affect the price
- BA single seller in the market
- CFew and interdependent in their decisions
- DCompletely unregulated by competition law
4.Economics conceptsHard
The Phillips curve originally suggested:
- AThat unemployment has no link to inflation
- BThat inflation and unemployment always rise and fall together in the short run
- CA trade-off between inflation and unemployment in the short run
- DThat higher taxes always reduce inflation
3Solutions
1.Price elasticity of demand
Answer: E = −2.163
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
(230 − 200)/((200 + 230)/2) = 30/215 = 0.1395
Relative change in price
(7.5 − 8)/((8 + 7.5)/2) = −0.5/7.75 = −0.06452
Elasticity
E = 0.1395/−0.06452 = −2.163
Answer
E = −2.163
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 = 2000 − 20·30 = 1400
Point elasticity
dQ/dP = −20
E = (dQ/dP)·P/Q = −20·30/1400 = −0.4286
Answer
E = −0.4286
|E| < 1: demand is inelastic.
3.Economics concepts
Answer: C · Few and interdependent in their decisions
Why this is the answer
Oligopolies have a few large firms whose pricing and output decisions affect each other, often analysed with game theory.
Answer
C · Few and interdependent in their decisions
4.Economics concepts
Answer: C · 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
C · A trade-off between inflation and unemployment in the short run
ExamProblems · examproblems.com/courses/microeconomics