The midpoint formula is ep q 2 q 1 q 2 q 1 2 p 2 p 1

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The midpoint formula is:    Ep = (Q 2  – Q 1 ) / ([Q 2  + Q 1 ] / 2)              (P 2  – P 1 ) / ([P 2  + P 1 ] / 2) Example: If the price of an ice cream cone  increases from $2.00 to $2.20 and the amount  you buy falls from 10 to 8 cones, then your  elasticity of demand would be calculated as:
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. P 1  = 2.00 P 2  = 2.20 Q 1  = 10 Q 2  = 8 Ep = (8 – 10) / (8 + 10) /2          (2.20 - 2.00) / (2.20 + 2.00) /2      = -2 /9         .20 / 2.10      = - .22 / .095      =  -2.32
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. In both examples, we have an elasticity  coefficient that has a negative sign. But, remember the law of demand:  as P , Qd  The coefficient will always be a negative number. Since we’re smart economists and know this,  when we calculate price elasticity, we drop the  negative sign  (we know it will always be  negative).
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. So, in our milk example, Ep = .25 Since Ep < 1, the demand for milk is inelastic. Demand does not respond strongly to changes in  price. In our ice cream example, Ep = 2.32 Since Ep > 1, the demand for ice cream is  elastic. Demand responds strongly to changes in price.
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Generalities About Elasticities and  Their Determinants 1. Goods that are necessities tend to have inelastic  demand. Example: the demand for insulin would be  perfectly inelastic (no matter how much price  changes, if you have to have insulin, you’ll buy  it). Example: the demand for dentist visits would be  inelastic (if price went up, you may try to wait or  shop around, but you’ll still go to get rid of the  pain).
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. 2. Goods that are luxuries tend to have elastic  demand. Example: the demand for plasma TVs (if the  price is right, you may buy one, but you likely  won’t buy one if the price is too high for your  budget).  Example: vacations abroad (same reason as  above).
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. 3. Goods that have close substitutes tend to have  elastic demand. Example: Coke and Pepsi (if the price of Coke  goes up, many consumers will switch to Pepsi). Example: Eggs don’t really have a close  substitute (their demand is pretty inelastic).
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
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