You are advising a coffee shop manager who wants to estimate how much sales will change if the price of a latte rises. You tell him that he should measure the change in sales using the percentage change in quantity of coffee sold rather than the number of cups of coffee or the total ounces of coffee sold. Similarly, you tell him that he should measure the price increase in percentage terms rather than in terms of absolute dollars. Explain why he should measure elasticity in percentage terms rather than in terms of dollars and cups.
To advise the coffee shop manager the reason for using percentage method to calculate the elasticity.
Explanation of Solution
The elasticity of demand indicates the change in quantity demanded due to a change in price. However, the elasticity is unitless that means only magnitude of change is considered for example elasticity could be 1, 1.5, 1.7, etc. Here, elasticity is just a magnitude (numeric value). Thus, while calculating the elasticity, the absolute values like, dollars, units (number of teacup) does not matter. So, using the percentage method avoids the problem of different units of calculation and the problem of direction to change. Thus, it is advised to the manager to estimate the change in percentage term.
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