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 €25.00 to €19.00, weekly sales change from 1200 to 1320. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €25.00P2 = €19.00Q1 = 1200Q2 = 1320
E =
2.Price elasticity of demandHard
The demand for a product is Q = 640 − 8P, with P in euros. At which price P is the price elasticity of demand equal to −2?
Q = 640 − 8PE = −2
P = €
3.Economics conceptsMedium
In a simple closed economy without taxes, the MPC is 0.8. The Keynesian spending multiplier is:
- A1.25
- B5
- C8
- D0.8
4.Economics conceptsHard
The J-curve effect describes why, after a depreciation, the trade balance may:
- AImprove immediately and permanently
- BRemain unchanged for many years
- CWorsen at first and then improve
- DImprove at first and then worsen
3Solutions
1.Price elasticity of demand
Answer: E = −0.3492
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
(1320 − 1200)/((1200 + 1320)/2) = 120/1260 = 0.09524
Relative change in price
(19 − 25)/((25 + 19)/2) = −6/22 = −0.2727
Elasticity
E = 0.09524/−0.2727 = −0.3492
Answer
E = −0.3492
2.Price elasticity of demand
Answer: P = 53.33 €
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.
Elasticity as a function of price
E = −8P/(640 − 8P)
Solve for P
−8P = −2·(640 − 8P)
P·(−8 − 16) = −1280 → P = €53.33
Answer
P = €53.33
Check: Q = 213.3, E = −8·53.33/213.3 = −2.
3.Economics concepts
Answer: B · 5
Why this is the answer
1 / (1 − 0.8) = 1 / 0.2 = 5, so an extra €1 of spending can raise income by up to €5.
Answer
B · 5
4.Economics concepts
Answer: C · Worsen at first and then improve
Why this is the answer
In the short run, volumes are slow to adjust while import prices rise immediately, so the balance worsens before the Marshall–Lerner condition takes hold.
Answer
C · Worsen at first and then improve
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