Elasticity: Point ad Arc formula / Punt en Boog Formule

To recap:

We looked at the term elasticity.  What does it mean?? 

It measures the sensitivity of a change in price.  If Mango airlines decided to increase the price of airline tickets how will consumers react to this price change?  Will they be sensitive to the change in price or not? And will Mango make a profit now since the price for tickets increased?
  

In order to determine price sensitivity we need to calculate the price elasticity.
 

First we look at the Price Elasticity of Demand:

Price Elasticity of Demand can be calculated according to the Point or Arc formula.  By using the point formula it means that you calculate the elasticity of demand on a specific point on the demand curve.  When you use the arc formula you calculate the elasticity from one point TO another point on the demand curve.
  

Here is an example:
 

Imagine that at a price of R160, 1 000 pairs of jeans are sold (demanded). If the price declines to R140, then 2 000 pairs of jeans will be demanded. Calculate the point elasticity before the price decrease by making use of the point formula. 

Thus if we fill in the table below it looks like this:

-->

	P	Q
Point A	160	1000
Point B	140	2000
▲AB	P A- P B 160 -140 = 20	QA-QB 1000 -2000 = -1000
ΣAB	P A+ P B 160 +140 = 300	QA+QB 1000 +3000 = 4000

 

Point

E_d   =          (-1000/20) * (160/1000)

        =          -8

        =          8 Relative elastic since the elasticity value is > than 1.

It it were asked to calculate elasticity by making use of the arc formula the calculation will look like this:

Arc

 

       E_d        =         (-1000/20) * (300/3000)

                   =          -5

                   =          5 Relative elastic since the elasticity value is > than 1. 

Next time: Income elaticity