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Calculating Elasticity of Demand Using Midpoint Formula

Learn how to calculate the elasticity of demand using the midpoint formula. Elasticity measures the reaction of quantity to a change in price and can be classified as elastic, unitary elastic, or inelastic. This guide provides step-by-step instructions and examples.

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Calculating Elasticity of Demand Using Midpoint Formula

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  1. Calculating Elasticity of Demand (or Supply) Using the Midpoint Formula • Elasticity! • Think of Elasticity as a reaction (in quantity) to a change in price • Elasticity can be: • Elastic (Elasticity of Demand [Ed] is greater than 1) or • Ed > 1 • Unitary Elastic (equal to 1) • Ed = 1 • Inelastic (less than 1) • Ed <1 • Infinite • When we are dividing by zeo

  2. P D Q In this case, eye-ball the Demand Curve. It is steep. Because it is so steep, we know that it will be inelastic

  3. Calculating Midpoint • We’ll use an example (inelastic demand) • GAS RISES FROM $4.00 to $5.00 • (let’s hope not) • Quantity Demanded falls from 100 to 90 gallons • See the next slide

  4. P PRICE OF GAS! $5.00 $4.00 D 90 100 Q Let’s put some numbers to this

  5. ELASTICITY OF DEMAND DEFINED MATHEMATICALLY • Mathematically the formula is… • PEoD = (% Change in Quantity Demanded)/(% Change in Price) • First Calculate the % Change in Quantity Demanded • [QDemand(NEW) - QDemand(OLD)] / QDemand(OLD) • Second, Calculate the % Change in Price[Price(NEW) - Price(OLD)] / Price(OLD) • Finally, take the values from each and go back to the formula above (% Change in Quantity Demanded/% Change in Price

  6. The Midpoint Formula • The problem with the previous formula, is that you can only use it going in one direction (PRICE INCREASES FROM $4.00 to $5.00 • IT DOESN’T WORK VICE VERSA! • Won’t give the same result from $5.00 to $4.00 • The midpoint Formula solves the problem

  7. Our Example • Price Went up from $4.00 to $5.00 • It went up by one ($1.00) • The midpoint between $4.00 and $5.00 is $4.50 • Quantity Demanded decreased from 100 to 90 • It went down by 10 gallons • The midpoint between 100 and 90 is 95

  8. Our Example Continued • So, now that we have the numbers, let’s calculate the percentage change • First we’ll solve for quantity • Q2 –Q1/MIDPOINT • % Change in quantity using midpoint is as follows… • (90-100)/95 = -.10 • We will use ABSOLUTE VALUES! • So it’s 10%

  9. MIDPOINT FORMULA (cont) • Now we will solve for price • P2 – P1/MIDPOINT • ($5.00-$4.00)/$4.50 • .22 or 22% • FINALLY (drumroll…..) • % Change in Quantity /%Change in price • 10%(.10)/22%(.22) = .45 • SINCE .45 IS LESS THAN ONE (1) IT IS INELASTIC!

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