lackingideas, glad it's working out for you, but it's simply not the case that the body works out what bf to do and 'permits' this without an effect on supply.
This only happens with very well-established breastfeeding, when the supply is robust and the production line is maintained even without frequent stimulation.
The majority of women, trying to mix feed before, say, six or seven months, need to be very careful to limit the formula, and to be consistent about this.
Otherwise the production line slows down and then becomes insufficient to meet even the limited needs of the baby and formula has to increasse.
The most labour-intensive way of feeding a baby has to be breastfeeding plus formula plus expressed....this makes each feed a time of calculation and anxiety (has he had enough/too much time at the breast? Does he need formula to top up? Is he going to settle without? Do I have enough precious ebm? How much should I use? Does he need formula as well as the ebm? Should I put him back on the breast?). This is the opposite of happy, comfortable breastfeeding, and it becomes something of trap.
For some mothers, it is what they prefer and they feel that bf on its own is not working for them....but others end up in that situation because it creeps up on them. It usually ends up with with the mother switching totally to formula before she planned to.
OP, your midwife wants you to drop the formula, because she sees the scenario I have described around the corner. If you go with what she says, you will need confidence that your bf is working well, and that you are managing to improve the situation that led to the loss of weight. Babies losing weight is not a good thing, and does need addressing - but you have addressed that. If you want to continue breastfeeding for longer, then you do need to consider your midwife's advice, and to get the right help to put it in place.
Any of the bf helplines will give you support in working out what you have to do.