THE MIDPOINT METHOD: A BETTER WAY TO CALCULATE PERCENTAGE CHANGES AND ELASTICITIES
If you try calculating the price elasticity of demand between two points on a demand curve, you will quickly notice an annoying problem. The elasticity from point A to point B seems different from the elasticity from point B to point A. For example, consider these numbers:
Point A: Price = $4 Quantity = 120
Point B: Price = $6 Quantity = 80
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 the quantity demanded of a good is negatively related to its price, the percentage chan e in quantity will always have the opposite sign as the percentage change in price. In this example, the percentage change in price is a positive 10 percent (reflecting an increase), and the percentage change in quantity demanded is a negative 20 percent (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 as positive numbers. (Mathematicians call this the absolute value.) With this convention, a larger price elasticity implies a greater responsiveness of quantity demanded to price. .
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