Publication: Journal of Economic Education
Volume: Volume 23, No. 1
Issue: Winter 1992
Pages: pp. 17-21
Author(s): Alan J. Daskin (Boston University)
Title: Two Propositions on the Application of Point Elasticities to Finite Price Changes
Abstract: This paper proves two counterintuitive propositions about using point elasticities to estimate quantity changes in response to finite price changes: (i) If o denotes the point elasticity at a point (po, qo) on a linear demand curve, the proportional change in quantity demanded ( q/qo) associated with a proportional change in price of p/po is exactly o( p/po); and (ii) if denotes the point elasticity of an isoelastic demand curve, the proportional change in quantity demanded ( q/qo) associated with a proportional change in price of x p/po is only approximately equal to ( p/po). That approximation overstates (understates) the proportional change in quantity for an increase (a decrease) in price, and the quality of the approximation worsens with increases in |x| or | |.