Measuring Price Elasticity of Demand

A candy bar going from 1 dollar to 1.10 empties the aisle because candy has close substitutes and takes a tiny slice of anyone's budget, so people shrug and buy chips instead. Insulin at the same 10 percent hike barely changes sales, because people who need it cannot substitute away or do without. Elasticity puts a number on that gap in responsiveness: it is percent change in quantity demanded divided by percent change in price. Demand is elastic when that number is greater than 1 (quantity reacts more than price did), inelastic when it is less than 1, and unit elastic at exactly 1.

The tricky part is picking a base for the percentages, since a move from 8 to 10 dollars is a 25 percent increase but the reverse move from 10 to 8 is only a 20 percent decrease. The midpoint formula fixes this by dividing each change by the average of the two values instead of the starting value, so you get the same elasticity whether price rises or falls. That average-based percentage is what makes the formula symmetric and why it is the standard tool for computing elasticity between two points.

Elasticity is not the same thing as slope, even though both describe how a curve bends. Slope compares absolute changes, dollars per unit, and stays constant along a straight-line demand curve. Elasticity compares percentage changes, so it depends on where you are on the curve, high up with low quantity and high price, or down low with high quantity and low price. This distinction sets up the rest of the unit: elasticity, not slope, is what determines how a tax burden splits between buyers and sellers and how total revenue responds to a price change.