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 €2.00 to €3.00, weekly sales change from 500 to 400. Use the midpoint (arc) method to find the price elasticity of demand E.
P1 = €2.00P2 = €3.00Q1 = 500Q2 = 400
E =
2.Price elasticity of demandHard
Demand for a product has a constant price elasticity of −0.8, so Q = A·P^−0.8. At a price of €25, 5 000 units are sold. How many units Q are sold at a price of €27.50?
E = −0.8P1 = €25Q1 = 5 000P2 = €27.50
Q = units
3.Economics conceptsMedium
In country A, 1 car costs 2 tonnes of wheat to produce; in country B, 1 car costs 4 tonnes of wheat. Which statement is correct?
- AB has a comparative advantage in cars and A in wheat
- BA has a comparative advantage in both goods
- CNeither country gains from trade
- DA has a comparative advantage in cars and B in wheat
4.Economics conceptsHard
In the Solow growth model, sustained long-run growth in output per worker comes from:
- APopulation growth
- BTechnological progress
- CA higher saving rate alone
- DGovernment budget deficits
3Solutions
1.Price elasticity of demand
Answer: E = −0.5556
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
(400 − 500)/((500 + 400)/2) = −100/450 = −0.2222
Relative change in price
(3 − 2)/((2 + 3)/2) = 1/2.5 = 0.4
Elasticity
E = −0.2222/0.4 = −0.5556
Answer
E = −0.5556
2.Price elasticity of demand
Answer: Q = 4633 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 = 27.5/25 = 1.1
New quantity
Q = 5 000·1.1−0.8 = 5 000·0.9266 = 4633
Answer
Q = 4633
3.Economics concepts
Answer: D · A has a comparative advantage in cars and B in wheat
Why this is the answer
A gives up less wheat per car, so it should specialise in cars; B's opportunity cost of wheat (1/4 car) is lower than A's (1/2 car), so B specialises in wheat.
Answer
D · A has a comparative advantage in cars and B in wheat
4.Economics concepts
Answer: B · 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
B · Technological progress
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