Midpoint Formula Economics- Calculate Price Elasticities

Causes and effects of obesity
February 24, 2020
Matched Pair Design: Definition & Examples
July 19, 2020
Show all

Midpoint Formula Economics- Calculate Price Elasticities

midpoint formula economics

Understanding different factors affecting the price of a product begins with familiarizing with midpoint formula economics. The idea behind it is assessing the relationship between the product’s demand and price in the market through calculations centered upon specific value changes. Besides, the calculator is an upgrade to the price elasticity formula and provides more details concerning how supply affects market price. Economists often utilize definite quantities of the products when calculating the elasticity coefficient for better results.

Typically, midpoint formula economics tries to determine factors influencing price by modifying the original price elasticity calculation for reliable outcomes. When wondering what is the midpoint formula, it is essential to realize that there are various aspects to put in place before becoming a pro as an economist. This article provides clear-cut information and calculation examples of product market prices based on midpoint arc formula economics.

Price Elasticity of Demand Formula

Over the years, the price elasticity of demand formula remains the standard calculator to determine the effects of price changes based on demand. The formula uses the comparison of two different prices of a commodity’s quantity to obtain the coefficient that defines the elasticity of demand. Yet, the elasticity of demand formula showed inconsistency as it provided distinct results due to the variation of both the initial and current product prices.

With this, the formula demanded a modification that led to the midpoint formula calculator. The midpoint formula eliminates inconsistencies by producing conclusive results regardless of the prices inserted. As such, the income elasticity of demand formula is determined and also helps on price regulating elasticity in the market. The method used is as below;

elasticity formula

Here is the price elasticity of demand example;

If a commodity’s price increases from $20 to $22, and the demand decreases from 100 to 87, an economist can determine market elasticity. The above formula will be used to calculate price elasticity demand as below;

In this example, the PED becomes -13/10 that signifies that the answer is 1.3. Notably, demand is elastic. Elastic demand means that the quantity is higher in percentage (%) than the change in price (%); that is, PED >1. However, when the values are modified, the results are likely to differ.

Midpoint Method Economics Formula

Unlike the price elasticity formula, midpoint calculator solely centers upon the percentage change of product quantity divided by the percentage change in price within a specified period. Intrinsically, the percentage change is the difference between the initial and current values divided by the average. The results obtained are multiplied by a hundred to get the needed percentage. In case there is a negative, ignore it and deal with absolute values only. These can be illustrated as below;

midpoint method formula economics

Midpoint Formula Economics Example

Let’s say you have 50 units, with each priced at $30. You sell only 40 units and remain with 10 units because you increased the price by $5, now retailing at $35. When using the midpoint formula economics calculator to understand the variations, you will significantly begin seeing the difference in your sales. That is, subtract 40 from 50. You are now selling 10 units lower.

After that, add the quantities and divide it by two to learn the average of the sale; (50 + 40)/2= 45. Divide the difference with the average to get the average change in quantity; 10/45 = 0.45. Do the same for the percentage change in price while following the same procedure. These can be illustrated as below;

elasticity of demand formula

In this example, the elastic of demand is 0.45/0.15, which is 3. With this value, economists can understand the market and make a conclusive decision based on market trends. However, you should note that the price elasticities of demand are often negative. This is because the price and quantity demands of a product typically drift apart. In other words, the price and quantity of commodities demanded are inversely related.

Understanding the Coefficient of Elasticity

Cross price elasticity of demand midpoint formula often produces three outcomes based on the variation of either the demand and price. That is, the coefficient may be equal to 1, <1 or >1. If the factor is equal to 1, the percentage change in price is identical to the percentage change in quantity. Therefore, this means that modifications of price have limited impacts on the demand with the supply remaining constant. Lowering or raising prices of specific products does not affect revenue.

When the elasticity coefficient is greater than 1, it means that demand is elastic. As such, an increase in price impacts demands, minimizing revenue gained from a given product. On the other hand, an elasticity coefficient of less than 1 indicated that the demand is inelastic; therefore, a change in price increases demand and the revenue as well. These instances help economists predict market trends and make necessary changes where applicable to keep the market running correctly.

Elasticity Between Two Point

When working with a midpoint formula elasticity of demand, there are generally two instances involved. Using a graph means that the price and unit sales vary between two points, which define the elasticity coefficient value obtained when calculated. The differences emerge due to the variation in price and demand range. Let’s look at the graph below;

what is the midpoint formula

From the graph, point B sells 80 units at $3, while point A sells 100 units priced at $2. As such, the elasticity varies for both points A to B and point B to A. Economists define this as Point A being the initial value while point B being the current one when moving from point A to B. The same is the opposite when we move from point B to point A.

This means that moving from point A to B suggest that the price increases by 50 percent when calculated by the midpoint method formula economics; (3-2)/2, while quantity reduces by 20 percent; (80-100)/100. There is, therefore, price elasticity of 0.4. When moving from point B to point A, the price lowers by 33 percent; (2-3)/3 and quantity raises by 25 percent; (100-80)/80. The price elasticity, therefore, becomes 0.75.

Elasticity Is Far from Slope

When you search midpoint method econ, several suggestions will show, with most of them talking about slope. However, you should note that determining elasticity of demand does not imply making calculations based on the slope of the graph. The slope is the rate of change between points in the curve. Contrarily, elasticity determines the calculated percentage of change between price and quantity from the rate of change from the slope. That is, the value obtained from calculating slope is entirely different from the price elasticity demand.

Factors Affecting of Demand

Several factors influence the elasticity of demand for a specific product in the market. Markets with substitutes often drive buyers to purchase cheaper products while absconding those with higher prices. Demand also plays another role in making demand elastic, especially when the price goes beyond the consumers’ budget. When such situations occur, consumers are likely to shy away or avoid products that are a luxury but not a necessity. This is a thoughtful approach, primarily when used as a midpoint formula microeconomics to aid in making decisions.

Bottom Line

If you are wondering how to use midpoint formula in economics, this guide helps you get insights on how to start midpoint formula economics at a go. Besides, there are experts online to help you with vital resources for an active process.

Leave a Reply

Your email address will not be published. Required fields are marked *