Principles of Microeconomics / Unit 4 MIC 0308 worked example, 60 to 90 seconds
Reading Elasticity off a Line
The idea
To classify a point on a straight-line demand curve without computing, find the midpoint of the line. Points above and to the left are elastic, the midpoint is unitary, and points below and to the right are inelastic. To confirm, take a small step from the point and run the midpoint method; the result will agree. The line's intercepts give the midpoint: halfway between the price intercept and zero, and halfway between zero and the quantity intercept.
In practice
Worked example: a demand line runs from a price intercept of twenty dollars to a quantity intercept of one thousand, so its midpoint is ten dollars and five hundred units. The point at sixteen dollars and two hundred units is above the midpoint, so demand there is elastic; a step to fourteen dollars and three hundred gives a quantity change of forty percent against a price change of about thirteen, an elasticity near three. The point at four dollars and eight hundred is below, so inelastic; a step to two dollars and nine hundred gives about twelve percent against sixty-seven, an elasticity of about zero point two.
Where people slip
Two cautions. The midpoint of the line is not the midpoint of the observed prices; it is set by the intercepts. And two lines through the same point with different slopes have different elasticities there, so the location alone is not enough without the line.
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