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

Eceonomic therios, Ask questiHow does economic theory contribute to manager...

Ask questiHow does economic theory contribute to managerial decisions? on #Minimum 100 words accepted#

What is oligopoly, What is Oligopoly? Oligopoly is a general market str...

What is Oligopoly? Oligopoly is a general market structure. This arises from similar forces that lead to monopoly, except within weaker form. This is an industry along with onl

Long-term policies to cure balance of payment deficits, Long-Term Policies ...

Long-Term Policies One long term option of tackling balance of payments deficit is export promotion .  In the long run this is the best method of improving a balance of payme

Determinants of consumption function, Other Determinants 1.          R...

Other Determinants 1.          Rate of Interest Is contained in the argument of the classified economists who argued that rational consumers will save more and consume les

Derevatives ., how to solve problems using derivatives ?

how to solve problems using derivatives ?

Oligopoly, pricing under oligopoly

pricing under oligopoly

Fixed exchange rate, Country A has a fixed exchange rate with country B. Du...

Country A has a fixed exchange rate with country B. Due to a recession in country B, demand for A's goods falls. Draw what would happen on the graph below. On the graphs, draw what

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

Importance of cross elasticity, Importance of Cross Elasticity Knowled...

Importance of Cross Elasticity Knowledge of cross elasticity is necessary when the government wants to impose a tariff on an imported commodity to protect a domestic industry.

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