Elasticity

Expect a vignette giving two prices and two quantities, then asking you to compute own-price elasticity and read off the total-revenue effect. The tell is the sign trap: own-price elasticity is negative, so item-writers classify by absolute value — “elastic” means |E| > 1. Use the midpoint (arc) formula — percentage changes taken over the averages of the two prices and quantities — when two distinct points are given; the point formula (reciprocal of slope times P/Q) for one point on a linear curve. On a straight-line demand curve, elasticity is not constant: elastic up top, unit-elastic at the midpoint, inelastic at the bottom — so total revenue is maximized at the unit-elastic midpoint.

The classic error is confusing a movement along demand (an own-price change, which elasticity measures) with a shift from the other determinants — exactly the distinction the demand and supply cards draw. Don’t blur the families either: income elasticity classifies normal versus inferior, cross-price classifies substitutes versus complements, own-price drives revenue. Memory hook: cross-price substitutes = positive, complements = negative.