Computing thf Price Elasticity of Demand

Now that we have discussed the price elasticity of demand in general terms, let's be more precise about how it b measured. Economists compute the price elastk-ity of demand as the percentage change in the quantity demanded divided by the percentage change in the price. That is,

In this example, the elasticity is 2, reflecting that the change in the quantity demanded is proportionately twice as large as the change in the price.

Because »he quantity demanded of a good is negatively relate«! to its prke, the percentage change in quantity will always have the opposite sign as the percentage change in price. In tlu» example, the percentage change in price is a pasttov 10 percent (reflecting an increase), and the percentage change in quantity demanded L«. a iM^ain* 20 perccnt (reflecting a decrease). For this reason, price elasticities of demand are sometimes reported as negative numbers In this book, we follow the common practice of dropping the minus sign and reporting all price elasticities of demand as positive numbers. (Mathematicians call this the abtduU nilue.) With this convention, a larger price elasticity implk-5 a greater responsiveness of quantity demanded to price.

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