Page 74 - DECO405_MANAGERIAL_ECONOMICS

Unit 5: Elasticity of Demand

Notes
Table 5.1

5.1.2 Numerical Measurement of Elasticity

What does it mean when we say that the elasticity of demand is 0.5? 0.4? 2.3? To answer this
question we have to examine the following definition for elasticity coefficient, E .
d
Percentage change in quantity demanded
E
d
Percentage change in price
One calculates these percentage changes, of course, by dividing the change in price by the
original price and the consequent change in quantity demanded by the original quantity
demanded. Thus we can restate our formula as:

Change in quantity demanded
Original quantity demanded
E
d Change in price
Original in price

This formula can also be written as:
Q 1 Q 0
Q
E 0
d P P
1 0
P 0
Where P = Original price,
0
P = New price
1
Q = Original quantity demanded
0
Q = New quantity demanded
1
Sometimes we may also find this written as:
Q
Q
E d P
P
Where is a notation used to denote change.

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