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So, elasticity, say the price elasticity of demand, is: $$\text{elasticity}=\frac{\text{% change in demand}}{\text{% change in price}}$$ So an elasticity of one corresponds to situations where a 1% increase in prices led to a 1% decrease in demand. E.g. if a price movement from \$2.00 to \$2.02 per unit led to demand changing from 100 million to 99 million units, elasticity would be -1.

My question is: why does it make sense to equate percentage increases and percentage decreases in this way? In what sense are an increase of 1% and a decrease of 1% equivalent (as is implied by the term 'unit elastic')?

I guess my scepticism comes from personal finance examples - e.g. when an item's sale price has been reduced to 95% of its original price, in order to work out the original price, you'd have to divide by 0.95, not multiply by 1.05. But, on some level, aren't we doing the opposite here (i.e. equating multiplying by 0.95 with multiplying by 1.05)?

Thanks!

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  • $\begingroup$ I am not sure I understand what you are asking. As you write, without taking the absolute value, an elasticity of -1 would mean a 1% decrease in demand. An elasticity of 1 (without taking the absolute value) would mean a 1% inrease in demand. So these do not seem to be equated? $\endgroup$
    – Giskard
    Oct 9 at 17:40
  • $\begingroup$ Sorry, the absolute value thing is not really my point. I mean, why are a 1% decrease and a 1% increase called "unit" something, given that 0.99 * 1.01 is not equal to 1? $\endgroup$ Oct 9 at 17:43
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    $\begingroup$ Ah! I see. This question is then a duplicate, I will go find one with nice answers. Give me a few minutes. $\endgroup$
    – Giskard
    Oct 9 at 17:44
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    $\begingroup$ Disclaimer: the nice answer under the previous question is mine. You may also find this question useful, its nice answer has a very different perspective. $\endgroup$
    – Giskard
    Oct 9 at 17:50