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. D P 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. D P Q Let’s put some numbers to this PRICE OF GAS! $4.00 $5.00 10090

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!