1 / 9

Calculating Elasticity of Demand (or Supply) Using the Midpoint Formula

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

cissy
Download Presentation

Calculating Elasticity of Demand (or Supply) Using the Midpoint Formula

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  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!

More Related