Price Elasticity of demand is then the ratio of the proportional change in the quantity demanded to

Price Elasticity of demand is then the ratio of the proportional change in the quantity demanded to

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Price Elasticity of demand is then the ratio of the proportional change in the quantity demanded to the proportional change in price. Proportional change in quantity can be expressed as where q 1 is the initial and q 2 is the new quantity demanded. Proportional change in price is similarly 1 is initial and P 2 is the new price. Elasticity ratio e is therefore, If symbols q and P are used for small variations in quantity and price respectively then, Note that q / p is in the limit derivative or marginal change and p/q is the reciprocal of average change, therefore Let’s illustrate this. In our demand schedule
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Unformatted text preview: example above, when price changes from 2 to 3 units, the quantity demanded changes from 4 to 1 units. Substituting these values we have: Note that the elasticity ratio 3/2 is more than one and has a negative sign. Both these are important features. Numerical values explain the extent or degree of change in demand while the sign of the ratio explains the direction of change. Since the law of demand is based on the inverse relation between price and quantity, the elasticity of demand is always stated with a negative sign....
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