The midpoint formula is an improvement on the original price-elasticity calculation of determining how various factors influence the price of a product. It analyzes the price elasticity of demand by considering the actual amount of goods purchased at instantaneous points. There was a need for improvement of the original price-elasticity calculation method because it produces different results depending on which purchase point you chose to pick your initial price. The midpoint formula provides consistent results regardless of the point you decided to pick your purchase price from.
The midpoint formula arrives at the price-elasticity for demand by dividing the percentage change in the quantity purchased by the percentage change in the price. To find the percentage change in the amount bought you subtract the original amount of goods purchased from the updated amount of the products purchased and then dividing the result you get by the average of the two quantities, the original and the updated.
i.e. Percentage change of goods purchase Initial number of goods = g1, updated number of goods = g2. Percentage change of goods purchased = (g2 - g1)÷((g1+g2))/2 Percentage change in price Initial price = p1, updated price = p2. Percentage change in the price = (p2 - p1)÷((p1+p2))/2 The price elasticity for demand will therefore be; Price elasticity for demand Elasticity coefficient = (((g2 - g1)÷((g1+g2))/2) )/(((p2 - p1)÷((p1+p2))/2))
The result obtained is known as the elasticity coefficient.
If the elasticity coefficient is equal to 1 then it means that the percentage change in the demand and the percentage change in the price are equivalent and there will be no increase or decrease in revenue when you change the price. If the elasticity coefficient is greater than 1, it means the demand is elastic, and any change in the price of the commodity will have an impact on the demand of the product and in turn the revenue to be achieved. An increase in price will lead to a decrease in revenue and a decrease in price will lead to an increase in revenue.
An elasticity coefficient of less than 1 means that the demand is inelastic and will have very minimal difference with the change in price. With inelastic demand, you can easily increase the price to maximize the profit without worry.
In January, a pair of sneakers retailed at $2 per pair. The total number of pairs sold was 100. In February, the price rose to $3, and only 80 pairs of sneakers were sold. What is the elasticity coefficient of demand for the pair of sneakers?
Solution. Elasticity coefficient = (((g2 - g1)÷((g1+g2))/2) )/(((p2 - p1)÷((p1+p2))/2)) G1 = 100, g2 = 80. P1 = 2, p2 =3 Coefficient of elasticity = (((80 - 100)÷((100+80))/2) )/(((3 - 2)÷((2+3))/2)) = ((-20)÷90) )/(((1)÷((5))/2)) = ((-0.22) )/(((1)÷((5))/2)) ((-0.22) )/0.4 Coefficient of elasticity = - 0.55. (The negative sign may be ignored as it just represents the fact that the demand of the product dropped. There was a negative effect on the demand by raising the price to $3).
The midpoint formula calculates the percentage changes by dividing the change by the average value. It produces the same result regardless of the direction of change. The direction of change can only be noted by the positive or negative sign.
How the demand in the market will respond to changes in the price of commodities will depend on a number of factors.
When substitutes exist such as generic brands, the consumers have more options to choose from and hence are more likely to opt away from the product if the price increases. The market share strength of the product will determine the level of elasticity that the product will have when competitors are present during the price change.
Overall price of the product versus the income of the consumer If the product is costly and takes up a huge amount of the consumer’s income, the price elasticity will be substantially high because an increase in the price will make the product expensive to more consumers.
The demand elasticity primarily depends on the importance of the product to the consumer. If the product is a basic necessity that the consumer requires the demand will most likely be inelastic regardless if any price differences but if the product is a luxury the consumer may opt otherwise.
All factors considered and the consumer has limited time to purchase a product from a store, the price increase will not make a difference in the demand of the product because they will be rushing to make a purchase.
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