Explanation of differential equation for Price Elasticity of Demand

Question

I understand that Price Elasticity of Demand (PED) measures the percentage change in quantity demanded of a good with respect to a percentage change in its price.

However, I don't quite understand the intuition behind the formula for PED being:

$e_{{\langle p\rangle }}={\frac {{\mathrm {d}}Q/Q}{{\mathrm {d}}P/P}}$

and not simply described by the following:

$e_{{\langle p\rangle }} = {\frac {{\mathrm {d}}Q}{{\mathrm {d}}P}}$

This might be quite an elementary question, but I'm hoping for a bit of clarification.

Answer 1

Consider a demand equation, $$Q=\alpha\ +\beta\ P$$

If you were to just use,

$$e_{{\langle p\rangle }} = {\frac {{\mathrm {d}}Q}{{\mathrm {d}}P}}$$

Then the result is only the differentiation with respect to $P$. This doesn't give you the information that you are looking for because you haven't specified the point at which you are measuring elasticity. To do this the second portion of the equation is necessary. Suppose you want to know the elasticity at $P=\$8$. By plugging $\$8$ into the demand equation you can calculate the quantity demanded at $P=\$8$.

Personally, I have to think of this in two parts, (1) the differentiation with respect to $P$ (2) multiplied by the "spot" of the demand curve that I am examining, ${\frac PQ}$.

$e_{{\langle p\rangle }}={\frac {{\mathrm {d}}Q}{{\mathrm {d}}P}}* {\frac PQ}$

edit

The number that you calculate is the percent change of a 1% increase in price. For example, if $e=-0.3$, you can say that a 1% increase in price should cause a 0.3% drop in the quantity demanded.