Why & How Do We Use It?
Before I jump right in, let me go back a little and provide a bit of background to ensure we’re all on the same page…
In the beginning, the Earth was a big ball of fire, and then it cooled off. Just kidding…
What’s an elasticity for, again?
An elasticity measures the magnitude of the response of a variable to a change in another variable. Specifically, an elasticity puts a number to this response, saving us from saying it responded by “a lot” or by “a little”. These “responses” are percentage changes, and any elasticity is simply the ratio of the percentage change in one variable to the percentage change in another variable:
Calculating Percentage Changes & What Is Wrong With Tradition?
The problem arises when we calculate the percentage changes using the method we typically employ when we want to calculate how much, in relative terms, our Netflix bill increased over the years (did you know it first started at $7.99 per month back in 2010?), or how much our monthly coffee expenditures decreased when we stopped buying so much coffee at Starbucks (erm… hypothetically).
This “traditional method” is very sensitive to whether the variable of interest increased or decreased, and that means it will give us one value if the variable went up and another value if the variable went down. We don’t like that. We much prefer to have our percentage changes be independent of where the variable started and ended, did it go up, down, sideways… you get the point.
Enter the Midpoint Method
The Midpoint Method makes the percentage change independent of whether the variable increased or decreased by using the average, or midpoint (duh!), of the two values of the variable as denominator in the percentage change formula.
Watch the video below to make better sense of this all.
I recommend pausing the video often to make sure you are following my thinking and going back a few seconds (or minutes) if you find yourself confused or if you just tuned out for a bit and are now unsure of what I am saying and/or why I am saying it.
I’m in the mood for chocolate cake now, how about you?