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

Utility analysis or cardinal approach, Utility Analysis or Cardinal Approac...

Utility Analysis or Cardinal Approach: The Cardinal Approach to the theory of consumer behavior is based upon the concept of utility. It assumes that utility is capable of meas

What is the role of managerial economics in organizations, A. Write a detai...

A. Write a detailed essay on the importance of economics to managers. OR  What is the role of managerial economics in organizations ? B. What are the methods of measuring nation

Accomplish the desired outcome, Suppose that the present level of income in...

Suppose that the present level of income in the economy is $700 billion. It is determined that in order to decrease the unemployment rate to the desired level, it will be essential

Distinguish between moral hazard and adverse selection, Question: i) T...

Question: i) The manager of Top Rock Company is introducing a new product that will yield $200 millions in profits if the economy does not go into recession. However, if a rec

State about production theory, State about Production theory Production...

State about Production theory Production theory assists in determining the size of firm and level of production. It clarifies the relationship between marginal and average cost

Williamson model, williamson model and managerial discretion about its obje...

williamson model and managerial discretion about its objective and statement of problem

Discuss five negotiation skills of successful negotiators, QUESTION 1 N...

QUESTION 1 Negotiating skills remain a critical capability for procurement practitioners. Skilled negotiators have the potential to improve the negotiating outcome. Procurers o

discuss opportunity cost-explicit and implicit costs, Discuss and analyz...

Discuss and analyze following statement: When Burton Cummings graduated with honors from the Canadian Trucking Academy, his father gave him a $350,000 tractor-trailer rig. Rec

New commission structure motive salespeople, A medical insurance company of...

A medical insurance company offers its salespeople the following compensation scheme: each worker takes a fixed salary  and, in addition to that, a commission depending on the volu

Significance of managerial economics, discuss the significance of manageri...

discuss the significance of managerial economics in regards to business strategies employed by business entities currently operating in the global economy

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