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 €4.00, weekly sales change from 800 to 860. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €5.00P2 = €4.00Q1 = 800Q2 = 860
E =
2.Price elasticity of demandHard
Demand for a product has a constant price elasticity of −1.2, so Q = A·P^−1.2. At a price of €12, 2 000 units are sold. How many units Q are sold at a price of €6.00?
E = −1.2P1 = €12Q1 = 2 000P2 = €6.00
Q = units
3.Economics conceptsMedium
Comparative advantage means a country should specialise in goods it can produce:
- AWith the most workers
- BAt a lower opportunity cost than other countries
- CMore cheaply in absolute terms than every other country
- DOnly for its own consumption
4.Economics conceptsHard
In the Solow growth model, sustained long-run growth in output per worker comes from:
- AGovernment budget deficits
- BA higher saving rate alone
- CPopulation growth
- DTechnological progress
3Solutions
1.Price elasticity of demand
Answer: E = −0.3253
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
(860 − 800)/((800 + 860)/2) = 60/830 = 0.07229
Relative change in price
(4 − 5)/((5 + 4)/2) = −1/4.5 = −0.2222
Elasticity
E = 0.07229/−0.2222 = −0.3253
Answer
E = −0.3253
2.Price elasticity of demand
Answer: Q = 4595 units
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.
Ratio of the prices
P2/P1 = 6/12 = 0.5
New quantity
Q = 2 000·0.5−1.2 = 2 000·2.297 = 4595
Answer
Q = 4595
3.Economics concepts
Answer: B · At a lower opportunity cost than other countries
Why this is the answer
Even a country that is less efficient at everything gains from trade by specialising where its opportunity cost is lowest.
Answer
B · At a lower opportunity cost than other countries
4.Economics concepts
Answer: D · Technological progress
Why this is the answer
A higher saving rate raises the steady-state level of output per worker but not its long-run growth rate; only technological progress produces continuous growth.
Answer
D · Technological progress
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