.
Measurement of Price Elasticity
of Demand by Point Method
Presented By :
Tirtha Raj Khadka
Measurement of Price Elasticity of Demand by Point Method
i. Point elasticity on a linear demand curve:
Meaning:
According to the point method, Price elasticity of demand is the ratio between
lower segment and upper segment in a particular point of price demand curve.
It can be written as:
𝐋𝐨𝐰𝐞𝐫 𝐬𝐞𝐠𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐝𝐞𝐦𝐚𝐧𝐝 𝐜𝐮𝐫𝐯𝐞
EP =
𝐔𝐩𝐩𝐞𝐫 𝐬𝐞𝐠𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐝𝐞𝐦𝐚𝐧𝐝 𝐜𝐮𝐫𝐯𝐞
It can be explained with the help of price elasticity of demand as well as
following figure:
We know that,
∆𝐐 𝐏
Price elasticity of demand (EP) = x , Here, - Sign indicates inverse
∆𝐏 𝐐
relationship between price and demand for a commodity. So that (-) sign is
ignored.
From figure,
Initial Price = OP = BQ Y
A
New Price = OP1
B
Price
Change in Price (∆𝐏) = 𝐏𝐏𝟏 = 𝐁𝐌 P
Initial Quantity = OQ ∆𝐏
P1 C
New Quantity = OQ1 M
Change in Quantity (∆𝐐) = 𝐐𝐐𝟏 = 𝐌𝐂 ∆𝐐
X
∆𝐐 𝐏
O Q Q1 D
Price elasticity of demand (EP) = x
∆𝐏 𝐐
Quantity Demand
𝐐𝐐𝟏 OP
Price elasticity of demand (EP) = x
𝐏𝐏𝟏 OQ
𝐌𝐂 BQ
Price elasticity of demand (EP) = x --------------(1)
𝐁𝐌 OQ
Let us, taking triangle, BMC and BQD
1. < BMC = < BQD ( Right Angle)
2. < BCM = < BDQ ( Corresponding Angle)
3. < MBC = < QBD ( Common Angle)
Therefore, ∆BMC and ∆BQD are similarly. So that ratio of corresponding sides are
equal. It can be written as:
𝐌𝐂 𝐐𝐃
=
𝐁𝐌 𝐁𝐐
𝐌𝐂 𝐐𝐃
Now, putting the value of = in equation (1) then we get,
𝐁𝐌 𝐁𝐐
𝐐𝐃 BQ
Price elasticity of demand (EP) = x
𝐁𝐐 OQ
Cancelling the common BQ, then we get,
𝐐𝐃
Price elasticity of demand (EP) = -----------------(2)
OQ
Let us again taking triangle, PAB and BQD
1. < APB = < BQD ( Right Angle)
2. < PBA = < BDQ ( Corresponding Angle)
3. < PAB = < QBD ( Remaining Angle)
Therefore, ∆ PAB and ∆BQD are similarly. So that ratio of corresponding sides are
equal. It can be written as:
𝐐𝐃 𝐁𝐃
=
𝐏𝐁 𝐀𝐁
𝐐𝐃 𝐁𝐃
= [PB = OQ ]
OQ 𝐀𝐁
𝐐𝐃 𝐁𝐃
Now, Putting the value of = in equation (2) then, we get
OQ 𝐀𝐁
𝐁𝐃
Price elasticity of demand (EP) =
𝐀𝐁
Hence, we find that price elasticity of demand at point B on the straight line
demand curve AD is
𝐁𝐃 𝐋𝐨𝐰𝐞𝐫 𝐒𝐞𝐠𝐦𝐞𝐧𝐭
Price elasticity of demand (EP) from point (B) = =
𝐀𝐁 𝐔𝐩𝐩𝐞𝐫 𝐒𝐞𝐠𝐦𝐞𝐧𝐭
Now price elasticity of demand at different points of linear demand curve which
can be explained with help of following figure:
Y
A ( EP = ∞)
B ( EP > 1)
Price C ( EP = 1)
D ( EP < 1)
E ( EP = 0)
X
O
Quantity Demand
In the figure, AE represents a linear demand curve. Let us suppose that, C is the middle point
of demand curve. By using the formula of point elasticity of demand, we find out the
coefficient of price elasticity of demand as follows:
𝐋𝐨𝐰𝐞𝐫 𝐬𝐞𝐠𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐝𝐞𝐦𝐚𝐧𝐝 𝐜𝐮𝐫𝐯𝐞
EP at point C =
𝐔𝐩𝐩𝐞𝐫 𝐬𝐞𝐠𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐝𝐞𝐦𝐚𝐧𝐝 𝐜𝐮𝐫𝐯𝐞
𝐂𝐄
= = 1 [ CE = AC] which shows unitary elastic demand.
𝐀𝐂
𝐋𝐨𝐰𝐞𝐫 𝐬𝐞𝐠𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐝𝐞𝐦𝐚𝐧𝐝 𝐜𝐮𝐫𝐯𝐞
EP at point A =
𝐔𝐩𝐩𝐞𝐫 𝐬𝐞𝐠𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐝𝐞𝐦𝐚𝐧𝐝 𝐜𝐮𝐫𝐯𝐞
𝐀𝐄
= = ∞ which shows perfectly elastic demand.
𝐎
𝐋𝐨𝐰𝐞𝐫 𝐬𝐞𝐠𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐝𝐞𝐦𝐚𝐧𝐝 𝐜𝐮𝐫𝐯𝐞
EP at point B =
𝐔𝐩𝐩𝐞𝐫 𝐬𝐞𝐠𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐝𝐞𝐦𝐚𝐧𝐝 𝐜𝐮𝐫𝐯𝐞
𝐁𝐄
= > 1 [ BE> AB ] which shows relatively elastic demand.
𝐀𝐁
𝐋𝐨𝐰𝐞𝐫 𝐬𝐞𝐠𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐝𝐞𝐦𝐚𝐧𝐝 𝐜𝐮𝐫𝐯𝐞
EP at point D =
𝐔𝐩𝐩𝐞𝐫 𝐬𝐞𝐠𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐝𝐞𝐦𝐚𝐧𝐝 𝐜𝐮𝐫𝐯𝐞
𝐃𝐄
= < 1 [ DE < AD ] which shows relatively inelastic demand.
𝐀𝐃
𝐋𝐨𝐰𝐞𝐫 𝐬𝐞𝐠𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐝𝐞𝐦𝐚𝐧𝐝 𝐜𝐮𝐫𝐯𝐞
EP at point E =
𝐔𝐩𝐩𝐞𝐫 𝐬𝐞𝐠𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐝𝐞𝐦𝐚𝐧𝐝 𝐜𝐮𝐫𝐯𝐞
𝐎
= = 𝟎 which shows perfectly inelastic demand.
𝐀𝐄
ii. Point elasticity on a non – linear demand curve:
If point elasticity of a non linear demand curve is measured by drawing a
tangent to the demand curve to that point and then apply the formula. It can be
explained with the help of following figure:
Y
A D
Price
E
P D
B X
O Q
Quantity Demand
In figure, DD represents non linear demand curve. Price elasticity of demand at
point E can be measured by drawing the tangent line AB to the point E.
𝐋𝐨𝐰𝐞𝐫 𝐬𝐞𝐠𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐝𝐞𝐦𝐚𝐧𝐝 𝐜𝐮𝐫𝐯𝐞
Now, EP at point E =
𝐔𝐩𝐩𝐞𝐫 𝐬𝐞𝐠𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐝𝐞𝐦𝐚𝐧𝐝 𝐜𝐮𝐫𝐯𝐞
𝐁𝐄
=
𝐀𝐄
Measurement of Price Elasticity of Demand by Arc Method
According to arc method, price elasticity of demand is the average between two
points on a demand curve. This method is used when there is large change in
price and quantity demanded for a commodity. It can be computed as :
Change in demand
Average Quantity Demanded
Price Elasticity of Demand (EP) = - Change in Price
Average Price
Change in demand
Initial demand + New demand
𝟐
Price Elasticity of Demand (EP) = - Change in Price
Initial Price + New Price
𝟐
∆𝐐
Q1+ Q2
𝟐
Price Elasticity of Demand (EP) = - ∆𝐏
P1+ P2
𝟐
∆𝐐 P1+ P2
Price Elasticity of Demand (EP) = - X
Q1+ Q2 ∆𝐏
𝐐𝟐−𝐐𝟏 P1+ P2
Price Elasticity of Demand (EP) = - X
Q1+ Q2 𝐏𝟐 −𝐏𝟏
Where,
Q1 = Initial Quantity Demand , Q2 = New Quantity Demand
P1 = Initial Price, P2 = New Price
For Example,
Point Price Quantity
A 30 20
B 20 40
Price Elasticity of demand from Arc Method:
At the movement from A to B ,
Given, P1 = 30, Q1 = 20, P2 = 20, Q2 = 40
By using formula:
𝐐𝟐−𝐐𝟏 P1+ P2 𝟒𝟎−𝟐𝟎 30 + 20 𝟐𝟎 50 10
(EP) = - X =- X =- X = = 1.67 > 1
Q1+ Q2 𝐏𝟐 −𝐏𝟏 20+ 40 𝟐𝟎−𝟑𝟎 60 −𝟏𝟎 𝟔
Interpretation:
EP = 1.67 > 1 Which shows relatively elastic demand. It means, If 1 % decrease
in price of the commodity leads to 1.67 % increase in demand for a commodity
and vice versa.
Price Elasticity of demand from Percentage Method:
At the movement from A to B ,
Given, P1 = 30, Q1 = 20, P2 = 20, Q2 = 40
By using formula:
𝐐𝟐−𝐐𝟏 P1 𝟒𝟎−𝟐𝟎 30 𝟐𝟎 30 6
(EP) = - X =- X =- X = =3 >1
𝐏𝟐 −𝐏𝟏 𝑸𝟏 20 − 𝟑𝟎 𝟐𝟎 − 10 𝟐𝟎 𝟐
Interpretation:
EP = 3 > 1 Which shows relatively elastic demand. It means, If 1 % decrease in
price of the commodity leads to 3 % increase in demand for a commodity and
vice versa.
In above example, Arc method gives more reliable results than the percentage
method.
