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

Marijuana, Plot the demand schedule and draw the demand curve for the data ...

Plot the demand schedule and draw the demand curve for the data given for Marijuana in the case above.

Cross-elasticity of demand, Cross-elasticity is the measure of responsivene...

Cross-elasticity is the measure of responsiveness of demand for a commodity to the changes in price of its substitutes and complementary goods. For example, cross-elasticity of dem

Public Debt, what are the Sources of public debt

what are the Sources of public debt

Investment, Investment   Investment is the process of increasing the ...

Investment   Investment is the process of increasing the productive capital stock of a country, or can be defined as the production of goods not for immediate consumption.  T

Types of elasticity, what are the examples of the types of elasticity (pri...

what are the examples of the types of elasticity (price,income & cross elaticity

What is optimal output rule, What is optimal output rule? Optimal outpu...

What is optimal output rule? Optimal output rule: According to the optimal output rule, describe that profit is maximized through producing the quantity of output at that th

Determine the elasticity of demand, Elasticity of Demand As the law of ...

Elasticity of Demand As the law of demand establishes a relationship between quantity demanded and price for a product, it doesn't tell us exactly as how weak or strong the rel

Betsy''s utility function , Suppose that Betsy's utility function is given ...

Suppose that Betsy's utility function is given by the equation U=Y0.3 where Y is calculated in thousands of dollars. Betsy's present job pays her $20,000 (Y=20) per year and she ca

Externality in economics, Explain the concept of externality in economics? ...

Explain the concept of externality in economics? Give one example of a positive and a  negative externality in Australia.

Show the example on transaction cost theory, Q. Show the example on transac...

Q. Show the example on transaction cost theory? Coase begins from standpoint that markets could in theory carry out all production and that what needs to be illustrated is th

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