The price elasticity of demand is defined by , where is the price and is the quantity demanded. The price elasticity is a measure of how sensitive the quantity demand is to changes in the price.
This Demonstration shows two ways to calculate the price elasticity of demand: the point elasticity formula and the arc elasticity formula. The point elasticity formula is only useful for data points close to each other in value. Once points become too far apart, the arc elasticity formula is more accurate: .
The point elasticity refers to elasticity between two points on the demand curve, not the derivative of the demand curve at a point. The arc elasticity method is also known as the midpoint method.
Note that if , can be greater than , which is not possible in the real world.
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