Elasticity becomes zero when the demand curve touches the X -axis. (iii) Suppose the price of commodity X falls from Rs. 3 per kg to Re.lper kg. (i) Suppose the price of commodity X falls from Rs. 5 per kg. A monopolist has to consider the elasticity of demand for his product when he determines its price or changes the existing price. If the elasticity of demand for his product is highly elastic, he will maximise his profits by fixing a lower price; because of a lower price he is able to increase his sales. If the elasticity of demand for his product is less elastic or highly inelastic, he is in a position to fix a high price for the commodity.

- This concept is also of great significance in international trade policies, i.e., in the calculation of the terms of trade.
- Elasticity of demand is less than unity or less elastic when the total outlay (or expenditure) decreases with a fall in price and increase with a rise in price.
- It gives different values depending on whether the price rises or falls.

The point elasticity is thus measured by the ratio of the lower segment of the curve below the given point to the upper segment (the upper part) of the curve above the point. According to this method the Elasticity of Demand is measured between two points in the same demand curve. Thus, by this method both new and old demand and price are studied. The cross elasticity of demand depends on the nature of cross demand between the two commodities under consideration X and Y. The numerical value of the elasticity here will depend upon the substitutability of the two commodities. This demand is the ratio of the proportionate change in the quantity demanded of a commodity X in response to a given proportionate change in the price of some related commodity Y.

If elasticity of substitution is high, the share will be low. They are both related concepts and they are both price elasticities. It refers to the measure https://1investing.in/ of elasticity between two specific points in relation to two variables. On most curves, the elasticity of a curve varies depending on where you are.

## Definition – What is midpoint elasticity (also known as arc elasticity)?

This benefit comes at the cost of a more difficult calculation. To solve the above-mentioned inconsistency, the arc elasticity of demand can be used. In this scenario, the price elasticity of demand (PEd ) is −2, which is different from 1.25. If we consider different start and end points in the example, the calculation of price elasticity of demand (PEd ) will vary. Arc elasticity refers to the measure of elasticity between two specific points in relation to two variables. It compares the percentage changes in each variable between two specific points, making it useful when there is no explicit mathematical function defining their relationship.

(ii) While the elasticity co-efficient remain invariant when we change the scales, they do not remain invariant when we change the origin. Since there are no neutral zeros from which we measure economic magnitudes, the elasticity co-efficient are essentially arbitrary. Thus, we have in economic analysis such concepts as exports, net purchases, quantity of the inputs supplied etc., all of which are differences measured from arbitrary bases. This concept is also of great significance in international trade policies, i.e., in the calculation of the terms of trade. By terms of trade we mean the rate at which a unit of domestic commodity will be exchanged for unit of another commodity of another country. The terms of trade are determined by reference to the mutual elasticities of demand of the two countries for each other goods.

The elasticity of demand that is obtained in the case of this price change is called the arc-elasticity of demand—here over the arc R1R2 of the demand curve. Arc elasticity of demand calculates elasticity at the midpoint between two chosen points on the demand curve. This is done by using the midpoint between the quantities and prices of the two points. The measurement of elasticity of demand in terms of the total outlay method is explained in Fig. 5 where we divide the relationship between price elasticity of demand and total expenditure into three stages.

## Arc Elasticity

Since it accounts for the effects of price increases in both directions, arc elasticity offers a more balanced understanding of elasticity. This demonstrates the sensitivity of the PEd calculation to the specific points chosen on the demand curve, resulting in a different elasticity value when different start and end points are considered. It gives different values depending on whether the price rises or falls.

Price discriminators charge different prices for providing the same goods or services. For example, business trips are essential, and thus the business travelers’ demand is inelastic. So, an airline company can set a high price for business travelers. As a result, airfare for business travelers is typically higher than airfare for leisure travelers. This measures the responsiveness of demand compared to the starting or initial demand and price. An alternative to point elasticity is the arc elasticity which tells you what the elasticity is between the two points.

If the monopolist believes that the demand for a product is inelastic, then the demand for that product should not decrease significantly with a price increase. Demand is INELASTIC over the demand range considered, because the price elasticity of demand (ignoring the minus sign) is less than 1. Elasticity is the responsiveness of the quantity demanded, as a result of a change in price. In other words, it is the rate of change in the quantity demanded with respect to the rate of change in price. One can neither take the initial price nor the final price as a base.

## Price Elasticity of Demand

One must note that, at the corner point, i.e. end of the segment, elasticity equals zero. And, at the top, i.e. at the beginning of the segment, elasticity equals infinity. If you’d like to ask a question about the elasticities, microeconomics, macroeconomics or any other topic or comment on this story, please use the feedback form.

According to this relationship there are five types of price elasticity. Arc elasticity is an alternative approach to measure elasticity rather than using price elasticity. Based on whether elasticity is equal to, greater than, or less than one, demand is considered unit elastic, elastic, and inelastic. Elasticity of demand can be used to understand a customer’s willingness to pay and price products in a way that maximizes profits. Point elasticity is the price elasticity of demand at a specific point on the demand curve instead of over a range of it.

Price elasticity of demand gauges how responsive the quantity demanded of a product or service is to a price change. This metric is calculated by dividing the percentage change in quantity demanded by the percentage change in price. This definition explains both the conditions whether an increase in price or decrease in it has its effect on the quantity demanded less and more as the arc method of elasticity of demand case may be. When the price of a commodity falls and as a result of it and if the demand rises unexpectedly high, it is highly elastic demand. On the other hand when even an unprecedented fall in price does not increase much or increases the demand a little, it is inelastic demand. If as a result of fall or rise in price, if the demand changes proportionately, it is unit elasticity.

The numerical value of the co-efficient of Elasticity of Demand in unity. Diagrammatically, the perfectly inelastic demand is represented by a vertical straight line demand curve as shown in the figure Perfectly Inelastic Demand above. Further, Elasticity of Demand refers to the responsiveness of sensitiveness of demand to a change in price. When the demand responds very much to the given change in price, it is called elastic demand. When the demand responds very little to the given change in price, the demand is called inelastic.

Less is the elasticity of demand higher the incidence and vice-versa. In case of inelastic or less elastic demand, the consumers have to buy the commodity and must bear the tax. Marshall also suggested another method called the geometrical method of measuring price elasticity at a point on the demand curve. The simplest way of explaining the point method is to consider a straight line (linear demand curve). Let the straight line demand curve be extended to meet the two axes.