How do you calculate elasticity of demand?
Price elasticity of demand is a measure of sensitivity of demand to price. It is mathematically given as the ratio of % change in quantity demanded to % change in its price. The price elasticity of demand can be perfectly elastic, elastic, unit elastic, inelastic and perfectly inelastic. It can be calculated by two methods: Arc elasticity of demand and price point elasticity of demand.
Ed = (P1+P2)/(Q1+Q2) x (Q2-Q1)/(P2-P1)
where, P1 and P2 are price levels and Q1 and Q2 are quantities demanded at level 1 and 2. This is the equation for arc elasticity of demand and calculates the slope of elasticity curve by averaging over the price (or demand) interval. Since averaging is done, this method is somewhat inaccurate as compared to price point elasticity.
Ed = P/Q x dQ/dP
Here, we calculate the slope at a given price point.
Hope this helps.