How to Calculate Price Elasticity of Demand (Midpoint Method)
Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, using the midpoint method on AP exams.
Formula
PED = %ΔQ ÷ %ΔP, where %Δ = (new − old) ÷ ((new + old) ÷ 2). |PED| > 1 elastic, < 1 inelastic, = 1 unit elastic.
Steps
- 1Find the % change in quantity (midpoint). (Q₂ − Q₁) ÷ ((Q₁ + Q₂) ÷ 2).
- 2Find the % change in price (midpoint). (P₂ − P₁) ÷ ((P₁ + P₂) ÷ 2).
- 3Divide. PED = %ΔQ ÷ %ΔP. Take the absolute value to classify elasticity.
- 4Interpret. |PED| > 1 = elastic, < 1 = inelastic, = 1 = unit elastic.
Worked example
Price rises from $4 to $6 and quantity falls from 120 to 80. %ΔQ = (80−120)/100 = −40%; %ΔP = (6−4)/5 = 40%. PED = −40% ÷ 40% = −1 → unit elastic.
Frequently asked questions
Why use the midpoint method?
It gives the same elasticity whether price rises or falls between two points, because it divides by the average of the start and end values instead of the starting value.
What makes demand more elastic?
More substitutes, the good taking a larger share of income, it being a luxury, and a longer time horizon all make demand more elastic.