1. What is Price Elasticity of Demand?

Price elasticity of demand measures how much the quantity demanded of a good responds to a change in its price. It's a crucial concept in economics that helps businesses and policymakers understand consumer behavior.

2. How Does the Midpoint Method Work?

The midpoint method calculates elasticity using the average percentage change in both quantity and price:

Where:

• \( Q1 \) — Initial quantity demanded
• \( Q2 \) — New quantity demanded
• \( Mid\ Q \) — Average of Q1 and Q2
• \( P1 \) — Initial price ($)
• \( P2 \) — New price ($)
• \( Mid\ P \) — Average of P1 and P2

Explanation: The midpoint method provides the same elasticity value regardless of whether you're calculating from point A to B or B to A, making it more reliable than simple percentage changes.

3. Interpreting Elasticity Values

Details:

• Elastic (|E| > 1): Quantity changes more than price
• Unit Elastic (|E| = 1): Quantity changes equal to price
• Inelastic (|E| < 1): Quantity changes less than price
• Perfectly Inelastic (E = 0): Quantity doesn't change
• Perfectly Elastic (E = ∞): Any price change eliminates demand

4. Using the Calculator

Tips: Enter both quantity values (Q1 and Q2) and both price values (P1 and P2). All values must be non-negative. The calculator will compute the elasticity using the midpoint method.

5. Frequently Asked Questions (FAQ)

Q1: Why use the midpoint method instead of simple percentage change?
A: The midpoint method gives consistent results regardless of direction (A→B vs B→A) and avoids the "starting point" problem of simple percentage changes.

Q2: What does a negative elasticity value mean?
A: Negative values are normal for price elasticity of demand, indicating an inverse relationship between price and quantity. We typically use absolute value when interpreting elasticity.

Q3: When is elasticity greater than 1?
A: Elastic demand (|E| > 1) occurs when consumers are very responsive to price changes, often for luxury goods or goods with many substitutes.

Q4: What factors affect elasticity?
A: Availability of substitutes, necessity vs luxury, time horizon, and proportion of income spent on the good all affect elasticity.

Q5: How is this different from income elasticity?
A: Price elasticity measures response to price changes, while income elasticity measures response to income changes (using similar midpoint calculations).