As a result, the price elasticity of demand equals 0.55 (i.e., 22/40). All we need to do at this point is divide the percentage change in quantity demanded we calculated above by the percentage price change. The formula looks a lot more complicated than it is. To do this, we use the following formula: Similarly, a move from point B to point A (i.e., 80 to 100) is considered a 22% increase (/90).īy using the percentage changes calculated with the midpoint method, we can now compute a distinct price elasticity of demand between points A and B. 100 to 80) is considered a 22% decrease (i.e. Of course, this also holds for the quantity demanded. 2.50).Īs you can see, the percentage change is the same regardless of the direction we move. Similarly, a change from point B to point A (i.e., USD 3.00 to 2.00) is considered a 40% decrease (i.e. USD 2.00 to 3.00) is considered a 40% increase (i.e. Thus, according to the midpoint method, a change from point A to point B (i.e. 2) and the average quantity demanded is 90 (i.e. In the case of our example (see above) the average price is USD 2.50 (i.e. Unlike that, the midpoint formula divides the change by the average value (i.e., the midpoint) of the initial and final value. Usually, when we calculate percentage changes, we divide the change by the initial value and multiply the result by 100. This indicates a price elasticity of 0.75 (i.e., 25/33).Īs mentioned before, we can avoid this problem by using the so-called midpoint method. 3) while quantity increases by 25% (/80). By contrast, going from point B to point A, the price only decreases by 33% (i.e. This indicates a price elasticity of 0.4 (i.e., 20/50). 2) while quantity decreases by 20% (i.e. That means, going from point A to point B, the price increases by 50% (i.e. Meanwhile, at point B, price and quantity are USD 3.00 and 80 units, respectively. To illustrate this, let’s look at the graph below.Īs you can see, at point A, the initial price is USD 2.00, and the quantity is 100 units. However, if we move from point B to point A, the initial value is at level B. Now, if we move from point A to point B, the initial value is at level A. While this seems odd at first, it makes perfect sense because we generally calculate percentage changes relative to their initial value. When we try to calculate the price elasticity of demand between two points on a demand curve as described above, we quickly see that the elasticity from point A to point B seems different from the elasticity from point B to point A. But before we do that, let’s take a step back and look at why the issue we mentioned above arises in the first place. Thus, in the following paragraphs, we will learn step-by-step how to use the midpoint formula to calculate price elasticities. However, as you will notice sooner or later, this method has an annoying limitation: It will not produce distinct results when we use it to calculate the price elasticity of two different points on a demand curve (i.e., arc elasticity).įortunately, there is a simple trick we can use to avoid this issue: the so-called midpoint method to calculate elasticities. Price elasticity of demand is a measure that shows how much quantity demanded changes in response to a change in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price (see also Elasticity of Demand).
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