What is Point Elasticity?
Point elasticity, also known as price elasticity of demand (PED) at a specific point, measures the responsiveness of the quantity demanded of a good or service to a change in its price at a particular price and quantity combination. In other words, it helps to determine how sensitive the demand for a product is to changes in its price at a specific point along its demand curve.
Point elasticity is useful for analyzing how consumers respond to price changes at a specific price and quantity combination, but it may not provide a complete picture of overall demand responsiveness along an entire demand curve, as elasticity can vary at different price points. To understand the overall elasticity of demand for a product, economists consider the price elasticity of demand across a range of prices.
What is Arc Elasticity?
Arc elasticity, also known as the midpoint elasticity or the average elasticity, is a method used to calculate the price elasticity of demand or the price elasticity of supply when you have two price and quantity pairs. It provides an average measure of elasticity between two points on a demand or supply curve. This is particularly useful when you want to calculate elasticity over a range of prices rather than at a specific point.
Arc elasticity is particularly useful when you have discrete data points and want to estimate the overall elasticity of the curve within a specific range, reducing the potential distortion that can occur when relying on a single-point estimate of elasticity.
Difference Between Point and Arc Elasticity
- Point elasticity calculates elasticity at a specific point on the demand or supply curve by considering the price and quantity at that precise point. Arc elasticity calculates elasticity over a range of prices and quantities, considering the average percentage change in price and quantity between two points.
- Point elasticity provides an elasticity estimate at a single point, which may not represent the overall responsiveness of the curve accurately, especially if the curve is nonlinear. Arc elasticity is more precise because it considers a range of prices and quantities, making it suitable for situations where elasticity may vary along the curve.
- Point elasticity can be calculated with data from a single price and quantity combination. Arc elasticity requires data from two different price and quantity combinations, the initial and final points within a specific range.
- Point elasticity is useful for analyzing how consumers or producers respond to price changes at a specific point, such as when analyzing the immediate impact of a price change. Arc elasticity is more suitable for estimating overall elasticity when dealing with a range of prices, especially when the demand or supply curve is curved or nonlinear.
- Point elasticity may not capture variations in elasticity along the curve and might lead to inaccurate conclusions, especially if the price changes significantly. Arc elasticity accounts for variations in elasticity within a price range, providing a more comprehensive view of how elasticity changes as prices change.
Comparison Between Point and Arc Elasticity
| Parameters of Comparison | Point Elasticity | Arc Elasticity |
|---|---|---|
| Concept | Calculates elasticity at a single point. | Calculates elasticity over a price range. |
| Formula | Uses the derivative at a specific point. | Uses percentage changes between two points. |
| Sensitivity to Data | Requires data from a single point. | Requires data from two different points. |
| Suitable for Curved Curves | May not capture variations in elasticity along a curve. | Accounts for variations in elasticity, especially in curved curves. |
| Interpretation | Provides an elasticity estimate at a specific price-quantity combination. | Provides a more accurate representation of overall elasticity over a range of prices and quantities. |
- https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=5661698b073d0c570c5c266d1f1a490bb77b9801
- https://www.sciencedirect.com/science/article/pii/S0167814019303846
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