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

Disadvantages of the planned economy, Disadvantages of the Planned System ...

Disadvantages of the Planned System The centrally planned economies suffer from the following limitations: Lack of choice:   Consumers have little influence over what is p

How hospital use concept of managerial economics, How Hospital administrato...

How Hospital administrator use concept of managerial economics Hospital administrator can use tools and concepts of managerial economics to determine the optimal allocation of

Pigou effect, The pigou effect, also called the real balance effect, is nam...

The pigou effect, also called the real balance effect, is named after the well known Cambridge school economist Arthur Cecil pigou who had first clearly formulated the relationship

Analysis of consumer demand, Part A : Select one of the following economic...

Part A : Select one of the following economic issues and discuss how it impacts on your organisation. Analysis of consumer demand Cost analysis Market structure and

Short run cost , What will be the table of total cost function?

What will be the table of total cost function?

Price of cereal - cross price elasticity of demand, Suppose that the price ...

Suppose that the price elasticity of demand for cereal is -0.75 and the cross-price elasticity of demand between cereal and the price of milk is -0.9. If the price of milk rises by

Environmental issues of managerial economics, Environmental issues of Manag...

Environmental issues of Managerial economics Managerial economics also includes some aspects of macroeconomics. These relate to political and social environment in that anin

Price wars, on the application of any of the concepts learnt in Managerial ...

on the application of any of the concepts learnt in Managerial Economics. You may try to use these concepts to everyday problems in life or in any of the current debates on in the

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