Using average values for price and quantity means that the measured
elasticity of demand between any two points on the demand curve, call
them A and B, is independent of whether the movement is from A to
from B to A. In the example of cheese in Table 4-2 and 4-3 , the $2.00
change in the price of cheese is unambiguously 50 percent of the average
price of $4.00, and that percentage applies to a price increase from $3.00
to $5.00 or to a price decrease from $5.00 to $3.00.
Once we have computed the average prices and quantities as in Table
2 , the algebraic formula for price elasticity is straightforward. In this
formula, is the change in quantity demanded that occurs because of
the change in price whereas is the change in the price itself. In both
cases, we ignore the direction of the change and focus only on its
magnitude, or absolute value. The formula for price elasticity is then
where is the average price and is the average quantity. In the case of
cheese from Table 4-2 , we have
ΔQ
Δpη=ΔQ
̄Q ̄ ̄
Δp
̄pp ̄ Q ̄ ̄ ̄
η= = = =0.125( 123750 − 116250 )
120000
(5.00−3.00)
4.007500 / 120000
2.0/4.00.0625
0.5