Problems in using arc elasticity, Managerial Economics

Assignment Help:

The use of arc elasticity in economic analysis involves a good deal of chariness since it is capable of being misinterpreted. Arc elasticity coefficients vary between the same two finite points on a demand curve if direction of change in price is reversed. Arc elasticity for a decrease in price would be different from that for same increase in price between the same to points on a demand curve. For instance, the price elasticity between points J and K - moving from J to K - is equal to 1.11. This is the elasticity for decrease in price from 25$ to 10$. Though a reverse movement on the demand curve, which is from point K to J implies an increase in price from 10$ to 25$ that will give a different elasticity coefficient. In the case of movement from point K to J, P = 10, Δ P = 10 - 25 = - 15, Q = 50 and ΔQ = 50 - 30 = 20. Substituting these values in elasticity formula, we get

EP = (20/-15)(10/50) = 0.26

Measure of arc elasticity co-efficient in equation I for the reverse movement in price is obviously different from the one given in equation II. So, while measuring the arc elasticity, direction of price change must be carefully noted, otherwise it may yield misleading conclusions.

A method recommended to resolve this problem is to use average of lower and upper values of P and Q in fraction, P/Q, so that formula is

Ep = (δQ/δP). {(P1+P2)/2} / {(Q1+Q2)/2}

   = (Q1-Q2/P1-P2). {(P1+P2)/2} / {(Q1+Q2)/2}

Substituting the values from this illustration, we get

= (30-50/25-10). {(10+25)/2} / {(30+50)/2} = 0.58

This method has its own disadvantages as elasticity co-efficient calculated through this formula, refers to elasticity of demand at mid-point between points J and K (Fig. below). Elasticity co-efficient (0.58) isn't applicable for the whole range of price-quantity combinations at different points between J and K on the demand curve (Fig. below). It gives only mean of the elasticity between the two points. It is vital to note that elasticity between mid-point and the upper point J or lower point K will be different. So this method doesn't give one measure of elasticity.

672_Problems in Using Arc Elasticity.png

Figure: Measuring Arc Elasticity


Related Discussions:- Problems in using arc elasticity

Models of the firm, discuss the validity in zimbabwe of the grounds on whic...

discuss the validity in zimbabwe of the grounds on which the profit maximising model of the firm has been defended

Price elasticity of two parallel demand curves, It can be geometrically pro...

It can be geometrically proved that two elasticity are equal, which is., QB=RD Let's first consider ΔAOB. If we draw a horizontal line from point Q to intersect the vertical axis a

Define the demand schedule, Demand Schedule The law of demand can be ex...

Demand Schedule The law of demand can be explained through a demand schedule. A demand schedule is a series of quantities that consumers would like to buy per unit of time at d

Essay, Help with writing papers and analysis for case "The Ready-To-Eat Bre...

Help with writing papers and analysis for case "The Ready-To-Eat Breakfast Cereal Industry" in 1994

Describe MRPL and profit maximisation, Q. Describe MRPL and profit maximisa...

Q. Describe MRPL and profit maximisation? The common rule is that firm maximises profit by producing that quantity of output where marginal revenue equals marginal costs. Profi

Attributes in designing a good tax system, Question: a. What are the b...

Question: a. What are the basic attributes in designing a good tax system? b. Explain briefly how tax systems affect economic efficiency. c. The trade unionists advocat

Recession, Causes of the Nigeria recession

Causes of the Nigeria recession

Describe about the theory of profit, Describe about the Theory of profit ...

Describe about the Theory of profit Every industrial and business enterprise aims at maximising profit. Profit is the difference between total economic cost and totalrevenue. P

Elasticity of demand, A baseball team is trying to predict ticket sales for...

A baseball team is trying to predict ticket sales for the upcoming season. They are also considering increasing prices. The market has a population of 2 million persons. The team s

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd