2.14:
Ed through Mid-point Method
Consider two points on a demand curve: point A and point B.
At point A, the price is 6 dollars, and the quantity demanded is 120 units.
At point B, the price rises to 9 dollars, and the quantity demanded decreases to 80 units.
From point A to point B, the price increases by 50 percent, and the quantity demanded decreases by 33.33 percent. This gives a price elasticity of 33.33 over 50."
However, from point B to point A, the price decreases by 33.33 percent, and the quantity demanded increases by 50 percent. This gives a price elasticity of 50 over 33.33."
This discrepancy arises due to the different bases used in each direction. It can be avoided by calculating price elasticity using the midpoint method.
Here, the changes in quantity demanded and price are divided by their respective mid-points.
In the example, the midpoint price is 7.5 dollars, and the midpoint of the quantity demanded is 100 units.
From the midpoint method, the price changes by 40 percent, and the quantity demanded changes by the same percentage, resulting in a price elasticity equal to 1.
2.14 Ed through Mid-point Method
At point A, the price is $6 for 120 units. Moving to point B, the price increases to $9, resulting in a decrease in quantity demanded to 80 units. This translates to a 50 percent increase in price and a 33.33 percent decrease in quantity, leading to a price elasticity value of 33.33/50 or 0.67.
Conversely, moving from point B to A, entails a 33.33 percent decline in price and a 50 percent increase in quantity. This yields a price elasticity of 50/33.33 or 1.5.
This discrepancy arises from the different bases used for percentage changes in each direction. To avoid this inconsistency, economists employ the midpoint method for calculating price elasticity.
Using the midpoint method, the midpoint price is $7.5 ((6+9)/2), and the midpoint quantity is 100 units ((120+80)/2). According to the midpoint method, the price changes by 40 percent ((9-6)/7.5), and the quantity changes by the same percentage ((80-120)/100), resulting in a price elasticity equal to 1.
The midpoint method offers a consistent measure of elasticity regardless of the direction of movement along the demand curve.