Elasticity
Price elasticity of demand with the midpoint method.
Price elasticity of demand measures how strongly quantity demanded responds to a price change: the percentage change in quantity divided by the percentage change in price. If the absolute value is greater than 1, demand is elastic; less than 1, inelastic; exactly 1, unit elastic.
Elasticity tells a business what a price change does to revenue. Raising the price of a good with inelastic demand, such as petrol or medicine, raises total revenue; raising it for an elastic good, with many substitutes, lowers revenue. The midpoint method uses averages so the answer is the same whichever direction you measure.
Key terms
- Price elasticity of demand
- Percent change in quantity over percent change in price.
Key ideas
- Midpoint formula: .
- Elastic (): price and revenue move in opposite directions.
- Inelastic (): price and revenue move together.
- More substitutes, luxuries and longer time horizons make demand more elastic.
Worked example
When the price rises from $4 to $6, quantity falls from 120 to 80. Find the midpoint elasticity.
- Quantity change: .
- Price change: .
- .
- Unit elastic: revenue is unchanged (480 both times).
Answer: , unit elastic
Common mistakes
- Using the starting values instead of midpoints, giving different answers in each direction.
- Confusing slope with elasticity.
- Forgetting that demand elasticity is negative and comparing the absolute value.
Practice questions
Try each one, then open the answer. Numerical answers on this page are verified by an automated calculation check.
1.Price 10 → 12, quantity 100 → 90. Midpoint elasticity, to two decimals.
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2.A 10% price rise cuts quantity by 25%. Elasticity?
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3.With , does a price increase raise or lower total revenue?
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It raises total revenue (demand is inelastic)