Download Review: Elasticity of demand is the percentage change in the

Calculating Elasticity
Review: Elasticity of demand is the percentage change in the quantity
demanded that results from a given percentage change in the price.
The key to elasticity is that it is a unitless measure. The exact number of
units of change does not matter. Instead, elasticity is the ratio of the
percentage changes—percentage change in quantity divided by the
percentage change in price. This ratio is always expressed as an absolute
value.
Use the midpoint formula to calculate elasticity to ensure a uniform
measure.
Use the formula in the box on the left
to calculate the percentage change in
quantity demanded. If we start with
the quantity demanded of 20 cones
and move to a quantity demanded of
50 cones, we calculate a 150% change
in quantity demanded.
If we start with a quantity demanded
of 50 cones, however, and move to a
quantity demanded of 20 cones, we
calculate a –60% change in quantity
demanded.
Similarly, use the formula on the left to
calculate the percentage change in
price. If we start with the price of $2
and lower the price to $1, we calculate
a –50% change in price.
If we start with a price of $1, though,
and raise the price to $2, we calculate
a 100% change in price.
Using the formula in the box on the left
and working through the calculations,
we calculate the elasticity from point A
to point B. If we calculate the elasticity
from point B to point A, however, we
would get a different measure.
The problem lies in determining which
is the “old” price and quantity.
Economists generally do not use this
formula because the results can be
misleading.
Economists prefer to use the midpoint
formula instead. In this formula, the
divisor for both the percentage change
in quantity and the percentage change
in price are the midpoints between the
old and new quantity and price. The
midpoint formula yields uniform results,
and which quantity and price came first
is not an issue.
Note that elasticity of demand is
always a positive number because of
absolute value.