When we try to measure elasticity over a particular range of a demand curve (instead of a point on it), we need to apply the concept of Arc Elasticity of Demand.
Let us first present the problems that would arise if we use the concept of Point Elasticity of demand, for measuring price sensitivity of the product in consideration, over a certain range on its demand curve. Consider the following table.
| Price / unit (in Rs.) | Quantity demanded |
| 2 | 20 |
| 4 | 15 |
| 6 | 12 |
| 8 | 10 |
The table shows that when price of the product is Rs. 4, quantity demanded is 15 units and when price increases to Rs. 6 per unit, quantity demanded reduces to 12 units. Thus, for two unit increase in price, the change in quantity demanded is -3 units. Therefore, ∆Q / ∆P = – 3 / 2. From the definition of Point Elasticity we can say that Ed = P / Q. ∆Q / ∆P.
Image Source: cdn.yourarticlelibrary.com
ADVERTISEMENTS:
To find out elasticity of demand of the product between Rs. 4 per unit and Rs. 6 per unit, we need to know the value of P /Q; we face problems regarding selection of initial price and quantity combination. If we take Rs.4 per unit as the initial price, the value of Ed becomes equal to:
On the other hand, if we take Rs. 6 per unit as the starting point and consider the change as reduction in price, the value of Ed will be different from the previous one. That is,
Hence, to get rid of this problem regarding selection of initial price- quantity combination for a discrete price change on the demand curve,
We need to use the average of both prices and quantities instead of a single price-quantity combination. For this, the following formula is used:
