How responsive is the quantity buyers want to a change in price, and how does that responsiveness affect total revenue?
Topic 2.3 Price Elasticity of Demand: calculate price elasticity of demand using the midpoint formula, classify demand as elastic, inelastic, or unit elastic, apply the total revenue test, and identify the determinants of elasticity.
A focused answer to AP Microeconomics Topic 2.3, covering the price elasticity of demand, the midpoint formula, elastic versus inelastic versus unit elastic demand, the total revenue test, perfectly elastic and inelastic cases, and the determinants of elasticity, with worked exam-style questions.
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What this topic is asking
Topic 2.3 measures how responsive quantity demanded is to a price change. The College Board wants you to calculate the price elasticity of demand with the midpoint formula, classify demand as elastic, inelastic, or unit elastic, apply the total revenue test, recognize the perfectly elastic and perfectly inelastic extremes, and name the determinants of elasticity.
Calculating elasticity with the midpoint formula
Take the absolute value, because the percentage changes always have opposite signs (the law of demand), and economists report elasticity as a positive number.
Classifying demand
A vertical (perfectly inelastic) demand curve means quantity does not change at all when price changes, as for a life-saving medicine with no substitute. A horizontal (perfectly elastic) demand curve means buyers will take any quantity at one price but none above it, the demand a single perfectly competitive firm faces (Unit 3).
The total revenue test
Total revenue is price times quantity (). Elasticity tells you which way revenue moves when price changes.
The total revenue test is the fastest way to classify demand from data: compute total revenue before and after a price change. If revenue moved opposite to price, demand is elastic; same direction, inelastic; unchanged, unit elastic.
Determinants of elasticity
Demand tends to be more elastic (more responsive) when:
- More substitutes are available (buyers can switch away easily).
- The good is a luxury rather than a necessity (necessities are inelastic).
- The good takes a large share of income (a small share leaves buyers insensitive).
- More time passes (buyers adjust over the long run).
- The market is narrowly defined (a single brand is more elastic than the whole category).
Try this
Q1. A 5 percent rise in price causes a 15 percent fall in quantity demanded. Calculate the elasticity and classify the demand. [2 points]
- Cue. , which is greater than 1, so demand is elastic.
Q2. A firm with inelastic demand wants to raise total revenue. State whether it should raise or lower price. [1 point]
- Cue. Raise price: with inelastic demand, price and total revenue move together, so a higher price raises revenue.
Exam-style practice questions
Practice questions written in the style of College Board exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AP 2018 (style)1 marksMultiple choice. If a 10 percent rise in the price of a good causes a 4 percent fall in quantity demanded, demand is (A) elastic. (B) inelastic. (C) unit elastic. (D) perfectly elastic. (E) perfectly inelastic.Show worked answer β
The answer is (B). The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price: 4 / 10 = 0.4. Because the value is less than 1, demand is inelastic (quantity is relatively unresponsive to price).
(A) would need a value greater than 1, (C) exactly 1, (D) infinite, and (E) zero.
AP 2021 (style)4 marksFree response. A firm raises the price of its product from 12, and quantity demanded falls from 600 to 400 units. (a) Using the midpoint formula, calculate the price elasticity of demand. (b) Classify the demand as elastic, inelastic, or unit elastic. (c) State what happens to total revenue and confirm with the total revenue test. (d) Identify one determinant that tends to make demand more elastic.Show worked answer β
A four-point elasticity FRQ.
(a) (1 point): percentage change in quantity = (400 - 600) / ((400 + 600)/2) = -200/500 = -40 percent; percentage change in price = (12 - 8) / ((12 + 8)/2) = 4/10 = 40 percent; elasticity = |-40 / 40| = 1.0.
(b) (1 point): an elasticity of 1.0 is unit elastic.
(c) (1 point): with unit elastic demand, total revenue is unchanged: old TR = 4,800; new TR = 4,800. The total revenue test confirms unit elasticity because revenue did not change.
(d) (1 point): any one of, for example, more available substitutes, the good being a luxury, the good taking a large share of income, or a longer time horizon.
Related dot points
- Topic 2.1 Demand: state the law of demand, distinguish a change in quantity demanded from a change in demand, and identify the determinants that shift the demand curve.
A focused answer to AP Microeconomics Topic 2.1, covering the law of demand, the difference between a movement along and a shift of the demand curve, the determinants of demand, and the income and substitution effects, with worked exam-style questions.
- Topic 2.4 Price Elasticity of Supply: calculate price elasticity of supply using the midpoint formula, classify supply as elastic, inelastic, or unit elastic, and explain why time is the key determinant.
A focused answer to AP Microeconomics Topic 2.4, covering the price elasticity of supply, the midpoint formula, elastic versus inelastic versus unit elastic supply, the perfectly elastic and inelastic extremes, and why time is the chief determinant, with worked exam-style questions.
- Topic 2.5 Other Elasticities: calculate and interpret the income elasticity of demand (normal versus inferior goods) and the cross-price elasticity of demand (substitutes versus complements).
A focused answer to AP Microeconomics Topic 2.5, covering income elasticity of demand and the normal-versus-inferior distinction, cross-price elasticity of demand and the substitute-versus-complement distinction, and how the sign and size of each elasticity are interpreted, with worked exam-style questions.
- Topic 2.6 Market Equilibrium and Consumer and Producer Surplus: find equilibrium price and quantity, identify consumer and producer surplus on a graph, and explain why the competitive equilibrium maximizes total surplus (allocative efficiency).
A focused answer to AP Microeconomics Topic 2.6, covering how supply and demand determine equilibrium price and quantity, the measurement of consumer and producer surplus, total surplus, and why the competitive equilibrium is allocatively efficient, with worked exam-style questions.
- Topic 2.8 The Effects of Government Intervention in Markets: analyze binding price ceilings and floors, per-unit taxes and subsidies, and quantity controls, showing the resulting shortages, surpluses, tax incidence, and deadweight loss.
A focused answer to AP Microeconomics Topic 2.8, covering binding price ceilings and floors, per-unit excise taxes and subsidies, tax incidence and elasticity, quantity controls (quotas), and the deadweight loss intervention creates, with worked exam-style questions.
Sources & how we know this
- AP Microeconomics Course and Exam Description β College Board (2023)