In economics, the midpoint formula is used to determine the price elasticity of supply and demand. Elasticity is used to measure the responsiveness of the amount provided or quantity required to a change in one of the factors influencing supply and demand.
To illustrate the impact of additional factors on a product’s price, the midpoint formula is used to the initial price elasticity estimate. The influence of supply may be seen in this formula as well as the relationship between price and demand for a commodity. In the first case, the level of demand is established by the quantity of items actually purchased.
Demand’s Sensitivity to Price Elasticity
In economics, the term “price elasticity of demand formula” refers to a formula used to describe the relationship between a product’s demand and its price. The formula may be used to calculate the price elasticity of demand by comparing the quantity purchased at two different prices. However, the “original” formula may provide different results based on the numbers you enter for the “original” price and the “updated” price. This disparity renders the formula almost useless; hence, adjustments have to be made. As a result, we have a formula we call the midpoint that always works the same way, regardless of how the prices are inputted.
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Midpoint formula
One way to calculate the price elasticity of demand is to use the “midpoint formula,” which involves dividing the percentage change in purchase quantity by the percentage change in price. In order to get the percentage changes, one must first subtract the old values from the new ones, and then divide that result by the average of the two sets of numbers.
In the event that the result of the computation is negative, you may safely disregard the negative sign and operate with the absolute value.
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Midpoint Method vs. Point Elasticity
Let’s compare the point elasticity technique with the midway approach. Both methods for determining the elasticity of supply and demand may be relied upon to provide accurate results and need similar data. The point elasticity approach differs in that we need to know which value is the beginning value in order to determine if the price went up or down.
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Calculation
Imagine that you’ve always been able to sell 40 copies of a product for $20 each, but when you raised the price to $25, you only sold 30 copies. Take 40 and subtract 30, and the amount sold at the new, higher price will be 30 less. This is worth 10 points.
The average is then found by adding the two numbers and dividing by two. To get the decimal form of the amount change, just divide the difference by the mean. This leads to a change of 0.29 percentage points. It would be a percentage if you multiplied it by 100, but the differences between the two will cancel out in the end.
By doing the same math on the price change as before, we can get the result we want, which is 0.22%. After finding the formula for the median, the elasticity coefficient (1.32 in this case) is found by dividing the median value (0.29 in this case) by the standard deviation (0.022 in this case).
Analysis of the findings
The percentage changes in both price and demand would be the same if the elasticity coefficient was 1. This means that changing the price either up or down has no effect on sales. The demand is elastic when the elasticity coefficient is greater than 1, meaning that a change in price results in a larger shift in demand. When the price of a product is raised, it has a negative effect on sales, as was found in the above calculation.
If the elasticity coefficient is less than 1, then demand is inelastic; this means that price changes have a less impact on consumer behavior. If you want to make the greatest money possible, you should increase the price of the items in this situation.
Aspects that may affect elasticity
The elasticity of consumer demand for a product or service results from a number of different variables. Customers are less inclined to pay a premium if they have access to replacements, such as generic brands as opposed to name brands.
When prices represent a higher share of a consumer’s disposable income or when the product in question is a luxury item rather than a necessity, demand is more flexible. Demand is also affected by how much time has passed. When time is short, there is less room for change.
