A rise in the price of a certain commodity from $20 to $25 reduces quantity demanded from 25,000 to 10,000 units. Calculate the price elasticity of demand using the mid-point approach.

Reason: Initial Price (P0) = $20

Current Price (P1) = $25

Initial quantity (Q0) = 25000 units

Current quantity (Q1) = 10000 units

Mid point approach to elasticity:

Elasticity = (Q1-Q0)/(Q1+Q0)/2 / (P1-P0)/(P1+P2)/2

Elasticity = (10000 - 25000)/ (10000+25000)/2 / (25-20)/ (25+20)/2

Elasticity = (-15000)/ 17500 / 5/ 22.5

Elasticity = -0.85/ 0.22

Elasticity = -0.22

Hence we see that when the price changes by 1% the quantity demanded changes by 0.22%