Last time you learned about elasticity concepts. Now let's get hands-on! You'll calculate actual elasticity values using just your phone calculator and the midpoint formula.
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Ready to turn theory into practical market predictions?
Let's start with a real business scenario. A coffee shop raises prices from $3.00 to $3.50 per cup. Daily sales drop from 200 cups to 160 cups.
The owner wants to know: "Are my customers price-sensitive?"
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Do you know how to calculate this for the shop owner?
Here's the midpoint formula breakdown: Elasticity = (% Change in Quantity) / (% Change in Price)
Where % Change = (New Value - Old Value) / (Average of New and Old) x 100
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Your turn—how would you start calculating?
Step 1: Calculate percentage change in price. Old price: $3.00, New price: $3.50 Average price: ($3.00 + $3.50) ÷ 2 = $3.25
% Change in Price = ($3.50 - $3.00) ÷ $3.25 x 100 = 15.38%
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Can you see why we use the average as our base?
Step 2: Calculate percentage change in quantity. Old quantity: 200 cups, New quantity: 160 cups Average quantity: (200 + 160) ÷ 2 = 180 cups
% Change in Quantity = (160 - 200) ÷ 180 x 100 = -22.22%
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Why is this number negative?
Step 3: Calculate elasticity. Elasticity = |-22.22%| ÷ 15.38% = 1.44
Since 1.44 is greater than 1, demand is elastic! Customers are quite price-sensitive.
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What does this mean for the coffee shop owner?
