Question

As explained in the text, if the two points on the demand curve are quite apart from each other, i.e., when changes in price and quantity are large, the percentage method of calculating price elasticity of demand on a non-linear demand curve will give different values depending on the direction of change in price and quantity. How can we give the correct measure of price elasticity of demand in such a situation?

Answer 1

This can be done by defining P and Q in the formula as the average of the two prices and two quantities at the two points on the demand curve. The economists have suggested some modifications in the percentage method on these lines. The modified formula for measuring price elasticity of demand in such a situation is:

e_p = `(DeltaQ)/(DeltaP)xx((P_0  +  P_1)/2)/((Q_0  +  Q_1)/2)`