Introduction

The price elasticity coefficient gives us a measure of how sensitive or responsive the quantity demanded of a good or service is to a change in the price of the good or service. It is our measure of price elasticity.

If we know what the percentage change in price and the percentage change in quantity demanded are, we can calculate the price elasticity coefficient by using the following formula:

$$\text{Price Elasticity} = {\text{% change in quantity demanded} \over \text{% change in price}}$$

Using symbols, this is written as follows:

$${e_p} = {\%∆Q_d \over \%∆P}$$

Using the data in our example, where the price increases by 100% and the quantity demanded decreases by 1%, the price elasticity coefficient for the good is:

$${e_p} = {\text{1%} \over \text{100%}} = {0,01}$$

Should the answer not be –0,01? It should indeed. Since the quantity demanded decreases, it should be reflected as –1%, and the answer should therefore be –0,01. Economists usually ignore the negative sign, and report the elasticity coefficient as a positive value (in mathematics, this is called absolute values). One of the reasons for this is that we know that the law of demand indicates a negative relationship between the price and quantity demanded and, consequently, the value of the price elasticity coefficient will always be negative. Nothing is lost by using the absolute values as long as we remember that we are dealing with an inverse relationship.

Thus far it all seems to be straightforward. Obtain the percentage changes, and then calculate the price elasticity using the formula. And it is indeed that simple, except that we need to deal with how the percentage changes are to be calculated.