Measurement of elasticity involves calculating the responsiveness of the quantity demanded or supplied to changes in its determinants, such as price, income, or the price of related goods. Two common methods of measuring elasticity are point elasticity and arc elasticity.
- Point Elasticity: Point elasticity, also known as infinitesimal elasticity, measures elasticity at a specific point on the demand or supply curve. It provides an instantaneous measure of the responsiveness of quantity demanded or supplied to changes in price or other determinants at that particular point. Point elasticity is calculated using the following formula:
Point Elasticity = (Percentage Change in Quantity) / (Percentage Change in Price)
The formula is derived from calculus, where the elasticity is calculated as the derivative of the quantity with respect to the price at a specific point on the curve.
The advantage of point elasticity is that it gives a precise measure of elasticity at a specific price and quantity combination. However, the limitation is that it may not represent the overall elasticity over a broader price range.
- Arc Elasticity: Arc elasticity, also known as average elasticity, measures elasticity over a finite range or interval on the demand or supply curve. It is used when the percentage changes in price and quantity are relatively large, making it necessary to consider the average elasticity over the interval. Arc elasticity is calculated using the following formula:
Arc Elasticity = (Percentage Change in Quantity) / (Percentage Change in Price)
Here, the percentage changes are calculated between two points on the curve, one representing the initial quantity and price, and the other representing the final quantity and price. The average elasticity between these two points is calculated.
The advantage of arc elasticity is that it provides a more general measure of elasticity over a range of prices and quantities. However, the limitation is that it may not capture the precise elasticity at a specific point on the curve.