Point Elasticity vs.

Midpoint/Arc Elasticity

Price elasticity of demand is a measurement of the responsiveness of a change in the quantity

demanded for a change in the price of a good. Because some goods are much more expensive in
absolute terms – houses vs. loaves of bread – the changes in price of a good are measured in
percent changes. For example, a $2 price change in a loaf of bread would represent a substantial
change in price. While a $2 change in the price of a house would be laughably small. This idea
of relative change is also used for quantity. Again, buying a few more loaves of bread in a year
means something very different from buying a few more houses a year.

Measuring elasticity is to measure the percent change in quantity demanded for -- or over -- a
percent change in price. Elasticity in its most generalized form is

Percent Change∈Quantity
Elasticity=
Percent Change∈Price

Notice that there are no units of measure to elastic; the number is a scalar.

There are several methods to measure the ratio of percent changes. The texts utilizes a formula
known as the midpoint formula for finding elasticities. The midpoint formula is mostly used
in empirical projects. While the midpoint formula is correct, most of pour applications in
economics will utilizes an alternative formula known as the point elasticity formula. The
difference in the calculation is quite straightforward; moreover, the interpretation of any
calculated number is identical: ɛ<1 is inelastic, ɛ>1 is elastic, and ɛ=1 is unit elastic. Should you
be researching this in alternative textbooks, the midpoint formula is sometimes known as arc
elasticity.

Both formulas can look complex when first inspected. Indeed, the simpler formula used in most
introductory classes – the midpoint formula – can be quite intimidating. As given in the text, on
page 186, the midpoint elasticity formula is:

(Q2−Q1 ) ( P 2−P1)
Price Elasticity of Demand= ÷
Q1 +Q2 P1+ P 2
( 2 )( 2 )
When written in the somewhat more cumbersome format:
( Q2−Q1)
Q 1+ Q 2

Price Elsticity of Demand=

( 2 )
(P 2−P1)

( P +2 P )
1 2

One can begin to see this is a ratio of percent changes.

Price elasticity is measuring the percent change in quantity for a percent change in the price. The
(Q2−Q1)
numerator above, Q2+ Q1 , is just a measurement of the percentage change from the midpoint
( 2 )
of the change. For example, we might be measuring the percentage change in quantity of loaves
of bread for someone who went from buying 30 (Q1=30) loaves a year when the price was $3 to
20 loaves (Q2=20) a year when the price increased to $4.

(20−30)
The numerator above would be 30+20 , or -10/25 , or -.4, or a 40% decrease. This suggests a 12
2 ( )
unit decrease in the quantity of loaves: (30 ×.4=12). We know that the actual change was only
10; this method sacrifices some accuracy for great convenience. On the price side, the
(P 2−P1) (4−3) (1)
denominator above P1+ P 2 would be 3+4 , or 7 , or 2/7, or about .29, or 29%. This
( 2 ) 2 ( ) ()2
suggests that the change was: ( $ 3 ×.29)=$ .87 ¿. Again, we know the change in price was
actually $1, however, the loss in accuracy is tolerated in some applications.

While accuracy is sacrificed with the book’s mid-point method, only the observed – ore reported
– percent changes in price and quantity are needed to make the calculation. Moreover, we don’t
have to worry about whether it’s an increase in quality or a decrease in quantity in order to find
(20−30) (30−20)
=−.4 =4.
the absolute percent change: 30+20 , and 30+20 It’s either a 40% increase or a
2 ( ) ( 2 )
40% decrease. We need know just two prices and two quantities.

Also, in the book method there can be any change in the price – increase, or decrease – of the
good. That is, we could go from a loaf of bread costing $2 to it costing $10. When dealing with
the alternative type of elasticity measurement, there can be only a one unit – in this case $1 –
change in the denominator.

While you should be familiar with mid-point elasticity, we will almost always use point
elasticity in this class. Point elasticity finds the elasticity around a specific point. The formula
for point elasticity can also look a bit intimidating; however, if you follow it step by step it’s
straightforward.

∆ Q Q2−Q1
Percent Change∈Quantity % ∆ Q Q Q1
= = =
Percent Change∈Price % ∆ P ∆ P P2−P1
P P1
Using this method resolves the problem we demonstrated above. If we look at the change in the
20−30 −1
loaves of bread purchased we can calculate = =−. 33 ≈−33 %. This gives us accurate
30 3
answer. We can multiply 30 by -.33 to get -10: 20 is 10 units less than 30. Doing the same with
4−3 1
price we get an equally accurate answer: = =. 33=33 % . If we take $3 times 33% gives
3 3
us $1: the exact difference in price.

The shortcoming of the point elasticity is that the percent change depends on whether it a
positive or negative change. If we go from 30 loaves to 20 loaves we’ve gone down by a third;
30−20 1
however, it we go from 20 loaves to 30 loaves, = =.5, we’ve gone up by 50%. It’s the
20 2
same change, but its meaning changes with perspective.

For this, and some other, reasons one should always calculate the point elasticity such that the
denominator is positive and, therefore, the numerator is negative. (Because demand curves slope
down and increase in price will always lower the quantity demanded.)

Another constraint is that the elasticity is measured at a particular point and not over a range as
with the mid-point elasticity. We shouldn’t use point elastic to find the elastic for a multi-dollar
change in price. Again, if we had a price change that spanned more than a $1 change, point
elasticity would not be appropriate. In that case, we would instead want to use mid-point, or arc,
elasticity mentioned in the text.

Let’s do an example. Let’s take the (inverse) demand curve of P=12-Q and calculate the
elasticity at a price of $4 (P=4).

∆ Q Q 2−Q1 7−8 −1
%∆Q Q Q1 8 8 −1 4 −1
ε= = = = = = ∙ =
% ∆ P ∆ P P 2−P1 5−4 1 8 1 2
P P1 4 4

As I mentioned in class, it is customary to take the absolute value of the calculated elasticity.
The above calculation tells us that the point elasticity is ½ which is, naturally, less than 1.
Therefore this is an inelastic point.

ε= |−12|= 12 <1 ⟹inelastic

This point elasticity approach can be used with any of the other types of elasticities that we will
discuss in class: supply elasticity, cross-price elasticity, and income elasticity. While we might
technically consider the point elasticity approach only appropriate for a one-unit change in the
denominator, we’ll be using this approach for all our applications for simplicity.0