C. The Midpoint (Arc) Method: A Better Way to Calculate Percentage Changes and Elasticities

1. Because we use percentage changes in calculating the price elasticity of demand, the elasticity calculated by going from point A to point B on a demand curve will be different than an elasticity calculated by going from point B to point A.

a. A way around this is called the midpoint method.

b. Using the midpoint method involves calculating the percentage change in either price or quantity demanded by dividing the change in the variable by the midpoint between the initial and final levels rather than by the initial level itself.

c. Example: the price rises from $4 to $6 and quantity demanded falls from 120 to 80.

% change in price = (6 - 4)/5 × 100% = 40%

% change in quantity demanded = (120-80)/100 = 40%

price elasticity of demand = 40/40 = 1