What Is the Midpoint Formula in Economics?
The midpoint formula in economics is [(Q2 - Q1) / ((Q1 + Q2) / 2)] / [(P2 - P1) / ((P1 + P2) / 2)]. This formula represents the percent of change in quantity demanded over the percent change in price.
The midpoint formula in economics is used to measure the price elasticity of demand and yields a value that ranges from zero to negative infinity. It shows how sensitive consumers are to a change in price in a given service or product. The answer is a negative value since there is an inverse relationship between the price and quantity demanded, but economists often report the result as an absolute value by eliminating the negative sign. Also, the result is a pure number, which means it does not have any associated units. As the size of changes in price and quantity increases, the accuracy of the result decreases.
An example of using the midpoint formula to find the elasticity between 100 units selling at $2 each and 75 units selling at $3 each looks like this:
PED = [(75 - 100) / ((100 + 75) / 2)] / [(3 - 2) / ((2 + 3) / 2)]
PED = (-25 / (175 / 2)) / (1 / (5 / 2))
PED = (-25 / 87.5) / (1 / 2.5)
PED = -0.7