The demand for surfboards increases from 1000 to 1200 when t

The demand for surfboards increases from 1000 to 1200 when the price decreases from $2000 to $1800. Calculate the price elasticity of demand using the midpoint formula. Based on your answer what kind of good are surfboards?

Solution

Answer : Given,

New quantity demand (Q2) = 1200

Old quantity demand (Q1) = 1000

By mid point formula usation, we get,

% change in quantity demand =

[(Q2 - Q1) ÷ (Q1+Q2) / 2] × 100%

= [(1200 - 1000) ÷ (1000 + 1200) / 2] × 100%

= [ 200 ÷1100 ]× 100%

=18.182%

Again,

New price (P2) = $1800

Old price (P1) = $2000

By mid point formula usation, we get,

% change in price = [(P2 - P1) ÷ (P1 + P2) / 2] × 100%

= [ (1800 - 2000) ÷ (2000 + 1800) / 2 ] × 100%

= [ ( - 200) ÷1900 ] × 100%

= - 10.526 %

Now,

The price elasticity of demand

= % change in quantity demand / % change in price

= 18.182% / (-10.526)%

= - 1.727

= - 1.73

Therefore, by using mid point formula we get the price elasticity of demand = - 1.73

Here, price elasticity of demand = - 1.73 < - 1 . This means here the demand for surfboard is elastic. In case of normal good the demand is elastic. Therefore, surfboard is a normal good.