Principles of Microeconomics / Unit 4 MIC 0304 worked example, 60 to 90 seconds
Computing a Price Elasticity of Demand
The idea
From two price and quantity pairs, compute the elasticity in four steps. First, the change in quantity divided by the average quantity, times one hundred. Second, the change in price divided by the average price, times one hundred. Third, divide the first percentage by the second. Fourth, drop the sign and classify: above one is elastic, below one inelastic, exactly one unitary. Work in the same direction for both changes so the signs stay consistent before you drop them.
In practice
Worked example: at twelve dollars a museum sells eight hundred tickets a day, and at ten dollars it sells one thousand. The quantity change is two hundred over an average of nine hundred, about twenty-two percent. The price change is two dollars over an average of eleven, about eighteen percent. Twenty-two divided by eighteen is about one point two two, so demand is elastic between these prices.
Where people slip
Two slips. Dividing by the starting value gives twenty-five percent over seventeen, one point five, a different and direction-dependent number. And mixing the direction, quantity up but price measured as a rise, produces a positive ratio that hides the sign error rather than revealing it.
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