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Price Elasticity: Mid-Point Method & Its Practical Significance

Chapter 5, Problem 3

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QUESTION:

What is the main advantage of using the midpoint method for calculating elasticity?

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Price Elasticity: Mid-Point Method & Its Practical Significance
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Grasp the essentials of price elasticity of demand through various calculation methods. Dive deep into the unique and consistent mid-point method, understanding its relevance in fluctuating markets. Learn its practical application in analyzing market dynamics.

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QUESTION:

What is the main advantage of using the midpoint method for calculating elasticity?

ANSWER:

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The price elasticity of demand can be calculated using different formulas like the percentage method, mid-point method, and geometric method. The mid-point method is also be called arc elasticity, and it is calculated as,

\(E_{d}=\frac{\frac{Q_{2}-Q_{1}}{Q_{2}+Q_{1}}}{\frac{P_{2}-P_{1}}{P_{2}+P_{1}}}\)

Here, Q stands for quantity, P for price, and subscripts 1 and 2 indicate the initial and final states. The formula allows us to calculate elasticity as a percentage change in quantity demanded relative to a percentage change in price.

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