HOW IS PRICE ELASTICITY OF DEMAND COMPUTED?

We have already studied what elasticity of demand is. Now in this post i will be explaining how to compute the price elasticity of demand.

PRICE ELASTICITY OF DEMAND

Price elasticity of demand measures how much the quantity demanded responds to a change in price. As explained in previous post demand for a good is said to be elastic if quantity demanded responds substantially to changes in price. Demand is said to be inelastic if quantity demanded responds only slightly to changes in price.

(cited from Gregory Mankiw's Essentials Of Economics)

FORMULA

OR

The price elasticity of demand is always negative because with the increase in price the quantity demanded falls but we usually ignore the negative sign and take absolute values.

In the video an example is given to show how the above formula is applied.

MIDPOINT FORMULA

There is another formula which is known as Midpoint formula by the price elasticity of demand can be calculated. This formula gives us a consistent answer.