(Calculating
The price elasticity of demand by using a midpoint formula.
ConceptIntroduction:
Price Elasticity of Demand: It is the degree of responsiveness to change in quantity demanded due to change in price level.
Midpoint formula for measuring the elasticity of demand is given as follows:
Where,
Explanation of Solution
We have presented the information in following table:
Price (in $) | Quantity (in units) |
---|---|
$1 | 50 |
$0.20 | 70 |
By applying the mid-point formula, we get
On solving the above, we get,
e=0.25
Hence, elasticity of demand using midpoint formula is 0.25
Now, if the elasticity of demand remains constant along the demand curve, then a 10% rise in the price will reduce the quantity demanded. We can calculate the amount of reduction in quantity demanded in following way.
So, the quantity demanded will decrease by 2.5%
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ECON MICRO