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Point and arc price elasticity of demand

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Uploaded on Sep 25, 2011

This video explains point and arc elasticity of demand.
You can use the formula for price elasticity [(dQ/dP) times (P/Q)] to calculate point elasticity at every point along the inverse demand curve shown here. dQ/dP reads the change in quantity demanded divided by the change in price or the slope of the inverse demand curve drawn and P and Q represent the base quantities. The slope of the inverse demand curve is constant for a linear (i.e. straight line) demand curve and you can find this here by looking at the distance from 0 to point G for the change in quantity and from 0 to point A for the change in price. So the change in quantity demanded is 6 and the change in price is 6, this means that the slope is 1 (technically, the slope is minus 1 because as price rises, quantity falls and vice versa but there is a convention to ignore the minus sign so that we avoid confusion handling negative numbers). If we know the slope is always 1 then it possible to calculate each point along the demand curve. So, at B, where P = 5 and Q= 1, the formula gives a number of 5 (i.e. 1 times 5/1), which is the value given in the slide. The other elasticity values are A = infinity, C = 2, D = 1, E = 0.5, F = 0.2 and G = 0.

Remember, of course, that the numbers have to be translated into words. So, for example, at B a 1% change (rise/fall) in price leads to a 5% change (fall/rise) in Quantity demanded

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