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Price elasticity of demand measures how much, in terms of percentage
change, the quantity demanded responds to a change in price. In this
pedagogical note, first we intuitively introduce the very first
notion of price elasticity, which is a directional measure because
it describes the impact of an arbitrary change in price from one to
another on the percentage change in quantity demanded. Next, we show
how this measure becomes “point” price elasticity of demand when
demand is linear. Finally, with help from calculus, we show how it
leads to the development of (point) price elasticity of demand in
general. At each stage, qualitative results concerning changes in
total revenue and price are given and compared with what are in
textbooks. A quantitative result regarding predicting the percentage
change in total revenue from the price elasticity of demand and the
percentage change in price is also given for the case of linear
demand. By working progressively from the directional measure to the
linear case followed by the general case, and from non-calculus
approach to calculus approach, with precise definitions and 6
propositions, we intend to provide a unified framework for teaching
the notion and applications of price elasticity in principles of
economics as well as intermediate microeconomics. Flaws in textbooks
are identified and resolved as well.
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