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 €5.00 to €6.50, weekly sales change from 500 to 440. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €5.00P2 = €6.50Q1 = 500Q2 = 440
E =
2.Price elasticity of demandHard
The demand for a product is Q = 100 − 2P, with P in euros. Find the price elasticity of demand E at a price of €40.
Q = 100 − 2PP = €40
E =
3.Economics conceptsMedium
Using the expenditure approach, GDP equals:
- AWages + profits − taxes
- BC + I + G + (X − M)
- CC + I + G + X + M
- DC − I + G − (X + M)
4.Economics conceptsHard
The "paradox of thrift" suggests that if all households try to save more during a recession:
- AInflation will increase
- BInterest rates will rise sharply
- CTotal income may fall, so total saving does not rise
- DInvestment and growth will rise immediately
3Solutions
1.Price elasticity of demand
Answer: E = −0.4894
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
(440 − 500)/((500 + 440)/2) = −60/470 = −0.1277
Relative change in price
(6.5 − 5)/((5 + 6.5)/2) = 1.5/5.75 = 0.2609
Elasticity
E = −0.1277/0.2609 = −0.4894
Answer
E = −0.4894
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 = 100 − 2·40 = 20
Point elasticity
dQ/dP = −2
E = (dQ/dP)·P/Q = −2·40/20 = −4
Answer
E = −4
|E| > 1: demand is elastic.
3.Economics concepts
Answer: B · C + I + G + (X − M)
Why this is the answer
GDP is consumption plus investment plus government purchases plus net exports (exports minus imports).
Answer
B · C + I + G + (X − M)
4.Economics concepts
Answer: C · Total income may fall, so total saving does not rise
Why this is the answer
Higher saving reduces consumption and aggregate demand, lowering income; with lower income, aggregate saving may end up no higher, as Keynes argued.
Answer
C · Total income may fall, so total saving does not rise
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