Arc Elasticity
Arc elasticity is a measure of the responsiveness of one variable to a change in another variable along a specific arc of the demand curve. It is calculated by taking the average of the initial and final values of the variables and using this average as the base for percentage change calculations. This method is used to account for changes in both price and quantity demanded.
7 Key excerpts on "Arc Elasticity"
eBook - ePubThe Business Models Handbook
Templates, Theory and Case Studies
- Paul Hague(Author)
- 2019(Publication Date)
- Kogan Page(Publisher)
...36 Price elasticity Outlining opportunities for raising or lowering prices What the model looks like and how it works Most businesses have a good understanding of their customers. They know the number of customers they serve, they understand their needs, they know the competition and they have a good feel for the opportunities and threats. What most businesses do not understand is the price elasticity of their products. Price elasticity is an important concept in business. It describes the relationship between the price of the products and the demand for those products. Products have high elasticity if a small change in price results in a large change in demand. Think of this small price change as stretching (like elastic) the market considerably. Products that have a high level of elasticity are foodstuffs, particularly basic food items. These are products people need and so a reduction in their price encourages purchases in greater volume. Discount coupons and special deals abound in supermarkets, encouraging people to buy two for the price of one. When a change in the price of a product has very little effect on its demand it is inelastic. There is no change, no stretching. Typical products here are those used in industrial applications. People buy nuts and bolts and motors and chemicals to use as components in things they make. If the price of nuts and bolts changes, they cannot consume more because their need is determined by the volume output of whatever they are used in. At this stage it is important to make the distinction between the price elasticity of a generic product and the price elasticity of a specific brand. Take for example the fuel we use in our cars. Most of us are so dependent on cars for transport that we will pay a heavy price for fuel. The elasticity of demand for petrol is therefore inelastic (up to a certain point)...
eBook - ePub- Rob Dransfield, Rob Dransfield(Authors)
- 2013(Publication Date)
- Routledge(Publisher)
...As such, it measures the extent of movement along the demand curve. Price elasticity of supply – measures how the amount of a good firms wish to supply changes in response to a change in price. Price elasticity of supply captures the extent of movement along the supply curve. In the analysis that follows we will first review elasticity of demand before going on to examine elasticity of supply. Business managers are particularly interested in the extent to which demand is likely to respond to a price change. Measuring the response is referred to as the measurement of price elasticity. In addition, it is helpful to measure the responsiveness of demand to variables other than price – for example: The responsiveness of demand for a good to changes in the prices of other goods – referred to by economists as cross-price elasticity. The responsiveness of demand for a good to changes in income – referred to by economists as income elasticity. The econometric technique that economists use to measure elasticity is referred to as the coefficient of elasticity: So, for price elasticity of demand: For cross-price elasticity of demand: For income elasticity of demand: Price elasticity of demand A restaurant owner who is considering increasing prices will first want to know what teffect this will have on the customers. Will there be no effect, a small fall in customers, or a large fall? If the number of customers remains the same or falls by a smaller percentage than the price change, the business will make more revenue. The calculation used to estimate this effect is price elasticity of demand, which measures how quantity demanded for a product responds to a change in its price. Anyone wishing to raise or lower prices should first estimate the price elasticity. Measuring price elasticity Key Term Price elasticity – where falls in price have a more than proportional effect on quantity demanded, quantity demanded is said to be elastic...
eBook - ePubMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...Consequently, if price is reduced by a certain proportion (say 10 per cent), the quantity demanded is increased by the same proportion (10 per cent) and similarly for a price decrease. Consequently, neither a price increase nor a price decrease would affect the total expenditure on the product and so the seller’s revenue from the sale of the product remains unchanged with a change in price. The value of the price elasticity of demand depends on: The availability of substitutes. Demand for a commodity is more price elastic where there are close substitutes. The extent to which the commodities may be characterized as luxuries or necessities. Luxury goods are more price elastic whereas necessities are more inelastic. Time period. Demand is more price elastic in the long-run than in the short-run. Alternative uses. The more alternative uses a commodity has, the greater the price elasticity of demand. The proportion of total income spent on the product. The greater the proportion the higher the elasticity. Arc Elasticity of demand The above measures of price elasticity of demand refer to what may be called the point elasticity of demand. This is appropriate for small changes in price. For larger changes in price, the formula for arc price elasticity of demand is used. This may be expressed (with the subscript x omitted) as: 3.2.2 The PCC and the price elasticity of demand Price elasticity of demand may be determined from the shape of the price consumption curve (PCC). As explained in Chapter 2, the price consumption curve is the line joining successive equilibrium points as the price of good x falls...
eBook - ePub- Bonnie Nguyen, Andrew Wait(Authors)
- 2015(Publication Date)
- Routledge(Publisher)
...For this reason, we have two methods of calculating elasticity: the point method and the midpoint (arc) method. It will be appropriate to use the point method for calculating elasticity when we are calculating elasticity at a single point. The midpoint (arc) method will be appropriate when we are interested in elasticity moving from one point to another. These methods are discussed in more detail below. 10.2.1 Point method At times we are interested in elasticity at a particular point. For example, suppose when the price of a good is P 1, the quantity demanded of that good is Q 1 ; what is elasticity at the point (Q 1, P 1)? In these cases, we can use the point method of calculating elasticity. This simply involves recognizing that, for very small changes in the variables, ∆ y /∆ x = dy / dx. In general terms, the point method can be expressed as follows: 10.3 ε = (Δ y) / y (Δ y) / x = Δ y Δ x ⋅ x y = d y d x ⋅ x y Example. Suppose the demand curve for forks is given by Q = 100 – 2 P, and the price of forks is P = 30. What is the elasticity at this price? From the demand equation, we know that when P = 30, Q = 40. The slope of this line is ∆ Q /∆ P = –2. (This can also derived by the first derivative of the demand equation, which gives us dQ / dP = –2.) Substituting these values into the point formula gives: 10.4 ε = − 2 ⋅ 30 40 = − 1.5 The interpretation of this is: if price of forks increases by 1 per cent, the quantity demanded of forks falls by 1.5 per cent. 10.2.2 Midpoint (or arc) method Sometimes we are interested in elasticity when moving from one point to another. For example, suppose the price of a good changes from P 1 to P 2, which causes the quantity demanded to change from Q 1 to Q 2. Here, we are moving from one point (Q 1, P 1) to another (Q 2, P 2). However, it is unclear in this situation whether we should measure the change in price (resp...
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2016(Publication Date)
- Routledge(Publisher)
...The definition of price elasticity makes this clear: (9.7) E d = (ΔQ d /ΔP)*(P/Q d). Since the price (P) and quantity demanded (Q d) appear in the numerator and the denominator, the units of each cancel, leaving no units for an elasticity calculation. Hence, economists use elasticities rather than slopes to measure the responsiveness of consumer purchases to changes in prices and other economic variables. These unitless elasticities allow an unbiased comparison of the market responsiveness of apples and oranges. To summarize the discussion, elasticities measure how responsive consumers are to changes in price. An elastic demand curve shows that consumers are more responsive to price changes, while an inelastic demand curve reveals that consumers are not so likely to change their buying habits in response to price changes. The elasticities are comparable across all goods. The major determinant of the elasticity of demand is the availability of substitutes. If substitutes are available, then, when the price of a good increases, consumers switch to the lower-priced product. The price elasticity of demand explains many market-related situations. For example, gasoline stations in college towns often charge higher prices for gasoline the day before the beginning of Spring Break. On this day, when several thousand students are preparing to leave town, the demand for gasoline is relatively inelastic: many of the students will fill their cars’ tanks. Station owners know this and increase the price of fuel to take advantage of the fact that the students will pay higher prices in order to fulfill their vacation plans. Veterinarians often charge higher prices for rich people with poodles than for poor people with mixed breed mutts. Why? Because wealthier people are more likely to be willing and able to pay higher prices for vet services than poor people are...
eBook - ePubValue-based Marketing Strategy
Pricing and Costs for Relationship Marketing
- Santiago Lopez(Author)
- 2016(Publication Date)
- Vernon Press(Publisher)
...The stockholders, just like any investor, expect returns that justify the risks, effort, time, and funds sacrificed in any endeavor. This has an interesting mathematical background: the law of large numbers suggests that as the number of events (or trials) increases, results tend to approximate an average or expected value. For example, it is clear that when tossing a coin there is a 50% chance for each outcome; however, if a coin is tossed only a few times, the outcomes may not yield the 50% ratio; but, if the coin is tossed a very high number of times, the actual outcomes will very closely approximate the 50% expected ratio. 4.3 Price Elasticity Each product, or brand, has its own customer segment and its reaction to price changes is known as "price elasticity". While it is true that price is not the only determinant of demand, it does clearly have an effect on it. Price elasticity (of demand) measures the percentage change in quantity demanded relative to the percentage change in price. Mathematically it can be expressed as: Alternatively, Solving for ∆ Q% ∆ Q% = E x ∆ P% This indicates that for a given percentage change in price, there is a corresponding percentage change in quantity demanded; the relationship between these changes is defined as price elasticity. For example, if a price increases by 10% and the quantity demanded decreases by 20%, the relationship is: E = -20% / 10% E = -2 If a product has an elasticity of E = -0.5 and its price increases by 20%, then the percentage quantity (∆ Q%) demanded decreases by - 0.5 x 20% = -10%, given that ∆ Q% = E x ∆ P% This is very practical when considering price changes and discounts. Businesspersons gradually acquire an intuitive sense of elasticity, based upon their experience and judgment; they can very likely anticipate their customers´ reactions to a price change; put another way, they can "sense" elasticity...
eBook - ePubContemporary Economics
An Applications Approach
- Robert Carbaugh(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...The major determinants of the price elasticity of demand are the availability of substitutes, the proportion of buyer income spent on a product, and the time period under consideration. If a firm’s price and total revenue move in opposite directions, demand is elastic. If the firm’s price and total revenue move in the same direction, demand is inelastic. If the firm’s total revenue does not respond to a change in price, demand is unit elastic. Occasionally, the government will impose price controls on individual markets in which prices are considered unfairly high to buyers or unfairly low to sellers. When the government imposes a price ceiling on a product, it establishes the maximum legal price that a seller may charge for that product. Conversely, the government may establish a price floor to prevent prices from falling below a legally mandated level. Although price controls on individual markets attempt to make prices more “fair” for buyers and sellers, they interfere with the market’s allocation of resources. Price ceilings that are set below the equilibrium price level result in market shortages of a product. Price floors that are set above the equilibrium level entail market surpluses. Key Terms and Concepts price elasticity of demand (58) total revenue (62) elastic demand (62) inelastic demand (62) unit elastic demand (62) price ceiling (68) price floor (68) rent controls (69) Study Questions and Problems Suppose that researchers estimate that for every 1-percent change in the price of computers, the quantity demanded will change by 2.5 percent. Describe the price elasticity of demand for computers. What if researchers estimate that the quantity demanded for computers will change by 0.5 percent in response to a 1-percent change in price? Economists estimate the short-run price elasticity of demand for airline travel to be 0.1, 0.3 for housing, 1.5 for glass, and 1.9 for automobiles...
