Table4-3 Calculation of Demand Elasticities
This measure is called the price elasticity of demand, or simply demand
elasticity. Because the variable causing the change in quantity demanded
is the product’s own price, the term own-price elasticity of demand is also
used.
The Use of Average Price and Quantity in
Computing Elasticity
Table 4-3 shows the percentage changes for price and quantity using
the data from Table 4-2. The caption in Table 4-3 stresses that the
demand elasticities are computed by using changes in price and quantity
measured in terms of the average values of each. Averages are used to
avoid the ambiguity caused by the fact that when a price or quantity
changes, the change is a different percentage of the original value than it
is of the new value. For example, the $2.00 change in the price of cheese
shown in Table 4-2 represents a 40 percent change in the original price
of $5.00 but a 66.7 percent change in the new price of $3.00.
Elasticity of demand is the percentage change in quantity demanded
divided by the percentage change in price. The percentage changes are
based on average prices and quantities shown in Table 4-2. For
example, the $2.00-per-kilogram decrease in the price of cheese is 50
percent of the average price $4.00. A $2.00 change in the price of coffee
machines is only 2.5 percent of the average price per machine of $80.00.
η=PercentagePercentagechangechangeinquantityinpricedemanded