Practice
Elasticity by the midpoint method
Price elasticity of demand and supply, the total revenue test, and income and cross-price elasticity.
The skill
Elasticity measures how strongly quantity responds to a change in price, in income or in the price of another good. With the midpoint method, each percentage change is the change divided by the average of the two values, and elasticity is the percentage change in quantity divided by the percentage change in the cause. For price elasticity of demand, a magnitude above 1 is elastic and below 1 is inelastic. Students often divide by the starting value instead of the average, or turn the fraction upside down.
A worked example
When the price of bags of coffee rises from $14 to $21, the quantity demanded falls from 525 to 315 a month.
Use the midpoint method: each percentage change is the change divided by the average of the two values. What is the absolute value of the price elasticity of demand over this range? Round to two decimal places.
Solution
- Percentage change in quantity = (315 − 525) ÷ 420 ≈ −50%.
- Percentage change in price = (21 − 14) ÷ 17.5 ≈ 40%.
- Elasticity = −50% ÷ 40% = −1.25, so its absolute value is 1.25.
- More than 1, so demand is elastic over this range.
Answer: 1.25