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
A product sells 2 000 units per month at €4. Its price elasticity of demand is −2. The firm changes the price by −10%. Assuming %ΔQ = E·%ΔP, by how much ΔR does monthly revenue change?
P1 = €4Q1 = 2 000E = −2%ΔP = −10%
ΔR = €
2.Price elasticity of demandHard
The demand for a product is Q = 160 − 8P, with P in euros. Find the price elasticity of demand E at a price of €15.
Q = 160 − 8PP = €15
E =
3.Economics conceptsMedium
A currency depreciation tends to:
- AMake exports cheaper abroad and imports more expensive
- BHave no effect on trade
- CReduce the price of all domestic goods and make imports cheaper
- DMake imports cheaper
4.Economics conceptsHard
Using the "rule of 70", an economy growing at 7% per year will double its real GDP in about:
- A70 years
- B10 years
- C49 years
- D7 years
3Solutions
1.Price elasticity of demand
Answer: ΔR = 640 €
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.
New price and quantity
P2 = 4·0.9 = €3.60
Q2 = 2 000·1.2 = 2400
Change in revenue
ΔR = 3.6·2400 − 4·2 000 = 8 640.00 − 8 000 = €640.00
Answer
ΔR = €640.00
|E| > 1: demand is elastic.
2.Price elasticity of demand
Answer: E = −3
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 = 160 − 8·15 = 40
Point elasticity
dQ/dP = −8
E = (dQ/dP)·P/Q = −8·15/40 = −3
Answer
E = −3
|E| > 1: demand is elastic.
3.Economics concepts
Answer: A · Make exports cheaper abroad and imports more expensive
Why this is the answer
A weaker currency improves export competitiveness and raises import prices, which can increase inflation.
Answer
A · Make exports cheaper abroad and imports more expensive
4.Economics concepts
Answer: B · 10 years
Why this is the answer
The doubling time is approximately 70 divided by the percentage growth rate, so 70 / 7 = 10 years, showing the power of compound growth.
Answer
B · 10 years
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