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The midpoint formula economic calculator is an improvement of the original price elasticity formula. This formula seeks to determine how different factors affect the price of a product by assessing the relationship between a product's demand and its price. It can also show how supply affects product price. When studying how demand affects price, economists use actual purchase quantities to calculate price.
Are you having challenges with the midpoint formula? Click here to get help.
Original Price Elasticity Formula
The price elasticity of demand formula, which has been used for a long time, describes the effect of price changes on the demand of a product. The formula compares the quantity of goods purchased at two different price points to derive a coefficient that's used to show elasticity of demand. The problem with this formula is that it shows different results depending on which prices are entered as the initial and updated price. Due to this inconsistency, the formula needed modification, and this is where the midpoint formula came in. Unlike the price elasticity of demand formula, the midpoint formula can produce the same results irrespective of the prices entered.
The Midpoint Formula
The midpoint formula calculates the percentage change in quantities purchased and divides that with the percentage change in price within the same period. To calculate the percentage change, subtract the original from the updated value and then divide that with the average of the two. If the answer you get after deducting is negative, leave the negative sign out of the calculation so that you are working with an absolute value.
Example of Midpoint Formula at Work
Assume you sold 50 units of a given product at $30, but you only manage to sell 40 units after increasing the price to $35. Start by subtracting 40 from 50 to realize that since the price increase, you are selling 10 units less. Then add the two quantities and divide by two to get their average; in this case (40 + 50)/2 = 45. Divide the difference calculated above with the average to get the percentage change in quantity: 10/45 = 0.45 (Leave your answer in decimal form).
Repeat the procedure to calculate the percentage change in price. Subtract $35 from $30 to get $5, ignoring the negative sign. Then add $30 to $35 and divide by 2 to reach $32.5. Divide 5 by 32.5 to get 0.15. Lastly, divide 0.45 by 0.15 to get 3.
The elasticity coefficient in the above example calculated using the midpoint formula is 3.
Interpretation of Coefficient of Elasticity
If the coefficient of elasticity is equal to 1, it means that the percentage change in price is similar to the percentage change in quantity. This shows that changing the price of a product does not affect the demand for that product and it also indicates that the supply has not changed. For businesspeople, it shows that raising or lowering the price of goods does not affect revenue.
An elasticity coefficient of more than 1 shows that the demand for a product is elastic. In this case, increasing the price of a product reduces demand and consequently minimizes the revenue one gets from a given product. This is the case in the example shown above.
An elasticity coefficient of less than 1 shows that demand is inelastic which means that a change in price produces a smaller change in demand. For businesspeople, it means that increasing the price of a product will increase demand, which will increase the revenue of a business.
Price Elasticity
Many factors contribute to the elasticity of demand for a product. In a market where there are substitutes, buyers would be less willing to pay premium prices. A good example is a market that has generic and brand name products where consumers buy generic products because they are cheaper. Demand also becomes elastic if the price of a product goes past the budget of most consumers or the product is not a necessity but a luxury.
In instances where buyers have limited time, no time to compare different items on the market, the elasticity of demand is reduced.
Price Elasticity of Supply and Midpoint Formula
Just like the price elasticity of demand, the midpoint formula is used to calculate the elasticity of supply. The method works the same way; the percentage change in quantity divided by the percentage change in amounts.
Say the rent of an apartment rises from $8,000 to $9000 and the number of units rented rise from 2000 to 2500. Calculate the percentage change in quantity ((2500 - 2000)/ (2000 + 2500)/2) = 0.22. Calculate the percentage change in price ((9000 – 8000)/ (9000 + 8000)/2) = 0.12. Divide the percentage change in quantity with the percentage change in price (0.22/0.12 = 1.8).
A coefficient of more than 1 means that, the percentage change in quantity is more than the percentage change in price. A coefficient of less than one shows that the percentage change in quantity is less than the percentage change in price.