Manag., November-2017 – Q2
- Option : B
- Explanation : Arc Elasticity: Arc elasticity measures the average responsiveness to price change over a finite stretch on the demand curve. See Fig. below where MN refers to the stretch on the demand curve D1D2, it is not clear whether Point M or Point N should be considered to determine elasticity. It makes a difference from which point we start. Moving from point M to N is different from N to M. It is because the percentage changes in quantity and price is different, depending upon the price and quantity from which it is taken. The difference in the starting point reveals the different values of elasticity coefficients.
If we move from M to N, we get
If we move from N to M, we get
Now take the average of the two end values
Which means it is the price demand that is inelastic.
The arc elasticity is defined as below:
Where P1 and P2 are priced before and after changes, Q1 and Q2 are quantities demanded before and after changes respectively. DQ and ΔP refer to change in the quantity demanded and change in the price respectively. To make the arc elasticity more meaningful, compute between the points on the demand curve that is close enough.
