1. Here we show the midpoint formula for calculating elasticity of demand

2. Check this out
If you have a dollar and it grows to $2, then we say the gain was 100%.
But, if you start with $2 and it falls to $1, then we saw you lost 50%.
So, the movement between $1 and $2 is either 100% or 50%, depending on where you start.
This freaks some people out. We need to make this kind of calculation (twice actually, once for price and once for quantity) when we calculate an elasticity. So, we use a slightly different calculation method so people do not get freaked out. (Freaked is a highly technical term you usually only see in the journals.)

3. Midpoint formula
Because of the way we have calculated the elasticity up to this point we see that if we look at two points on the demand curve we get different elasticity values depending upon which point from which we start. This bugs people, so a midpoint formula was created.
To calculate each percentage change, do this
change in value divided by the average value.

4. Say the price moves from 11 to 10Q

5. Midpoint formula
From the example on the previous screen see the calculation as:
% change in Q (20 – 10)/[( )/2]
= (20 – 10)/15
= 10/15, (Fran rule: ignore above if you do not need it)
% change in P (10 – 11)/[( )/2]
= (10 –11)/10.5
= -1/10.5 (Fran rule still applies)
The elasticity of demand is thus
[10/15]/[-1/10.5]
=[10/15][-10.5] (times reciprocal)
= -7