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S4 Economics, Paper 2: price elasticity of demand and total revenue
S4 Economics, Paper 2: price elasticity of demand and total revenue
Elasticity is the percentage change in quantity demanded divided by that in price; above one a price cut raises revenue, below one a price rise does.
Focus Work out both percentage changes, classify the good as elastic, unit elastic or inelastic, then check with total revenue.
01 Paper details (check answers afterwards)
| Item | Detail |
|---|---|
| Questions | 10 |
| Suggested time | 25 |
| Difficulty mix | Foundation 4 · Intermediate 3 · Challenge 2 · Error redo 1 |
| Chapter | Chapter: S4 Economics: Demand, Supply and Elasticity |
| Level | S4 |
02 Questions (10 items)
- FoundationThe price of a good rises from $10 to $12 and quantity demanded falls from 100 to 80. Using simple percentage changes, find the price elasticity of demand (absolute value).
- FoundationThe price of a good rises from $20 to $25 and quantity demanded falls from 200 to 160. What is the price elasticity of demand (absolute value)?
- FoundationThe price of a good falls from $50 to $40 and quantity demanded rises from 100 to 130. What is the price elasticity of demand (absolute value)?
- FoundationIf demand for a good is perfectly inelastic, what does its demand curve look like?
- IntermediateIf the price elasticity of demand is 2 and price rises by 10%, how much does quantity demanded change?
- IntermediateIf the price elasticity of demand is 0.5 and price falls by 20%, by how much does quantity demanded rise?
- IntermediateA good’s price falls from $100 to $90 and quantity demanded rises from 100 to 120. What happens to total revenue?
- ChallengeA good’s price falls from $100 to $90 and quantity demanded rises from 50 to 65. Find the price elasticity of demand (absolute value) and the change in total revenue.
- ChallengeA good harvest raises supply from 1,000 to 1,200 units. Demand elasticity is 0.4 and the original price is $10. Find the new price and the change in farmers’ total revenue.
- Error redoA student says: “The more elastic the demand, the more total revenue a price rise will bring.” What is wrong?
03 Answers and one-line notes
| # | Answer | One-line note |
|---|---|---|
| 1 | 1.0 (unit elastic) | Price rises 20% and quantity falls 20%, so 20 / 20 = 1.0, which is unit elastic. |
| 2 | 0.8 | Price rises 25% and quantity falls 20%, so 20 / 25 = 0.8, which is inelastic. |
| 3 | 1.5 | Price falls 20% and quantity rises 30%, so 30 / 20 = 1.5, which is elastic. |
| 4 | A vertical line: quantity demanded does not change whatever the price, so elasticity is zero. | A perfectly inelastic demand curve is vertical: price changes do not alter the quantity demanded, so elasticity is zero. |
| 5 | Quantity demanded falls by 20%. | An elasticity of 2 means quantity changes twice as much as price: 2 x 10% = 20%, in the opposite direction. |
| 6 | It rises by 10%. | 0.5 x 20% = 10%: with inelastic demand the quantity response is smaller than the price change. |
| 7 | Total revenue rises from $10,000 to $10,800, an increase of $800. | Price falls 10% while quantity rises 20%; elasticity exceeds one, so a price cut raises total revenue. |
| 8 | Elasticity 3.0; total revenue rises from $5,000 to $5,850. | Price falls 10% and quantity rises 30%, so elasticity is 3.0; revenue goes from $5,000 to $5,850. |
| 9 | New price $5; total revenue falls from $10,000 to $6,000. | Supply rises 20%, so with elasticity 0.4 the price must fall 20 / 0.4 = 50%, from $10 to $5; revenue drops from $10,000 to $6,000. |
| 10 | Wrong: with elastic demand a price rise cuts quantity sharply, so total revenue falls; a price rise raises revenue only when demand is inelastic. | The revenue effect of a price rise depends on elasticity: when elasticity exceeds one, a price rise reduces total revenue. |
04 What to do after marking
- After marking, redo only the wrong items and write down which step went wrong (formula, unit, or misread number).
- Repeat the same item two days later; move to the next paper only when both attempts are correct.
- Parents only need the answer and note columns; there is no need to explain every item.
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