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Price Elasticity of Demand
Comparison of Arc and Point Price Elasticity Calculations
The method used to calculate price elasticity can yield different results depending on whether it's measured between two distinct points (arc elasticity) or at a single point using calculus (point elasticity). For non-linear demand curves, these two methods will typically produce different values. The point elasticity, derived from calculus, is considered a more precise measurement as it uses an infinitesimally small interval to estimate the slope at that specific point. In the special case of a linear demand curve, however, both the arc and point elasticity methods will give the same result because the slope of the curve is constant at all points.
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Comparison of Arc and Point Price Elasticity Calculations
Elasticity vs. Slope as a Measure of Price Responsiveness
Constant-Elasticity Demand Function
Rationale and Formula for Price Elasticity from Percentage Changes
A pharmaceutical company and a local gourmet coffee shop both increase the price of their flagship products by 10%. The pharmaceutical company sells a patented type of insulin, a life-saving medication for which there are no direct substitutes. The coffee shop sells a popular specialty latte, for which there are many alternative beverage options nearby. Based on the principles of consumer responsiveness to price changes, which of the following outcomes is most likely?
A local movie theater raises its ticket price by 15%. In response, the number of tickets sold per week decreases by 30%. Based on this information, how would you characterize the consumer demand for movie tickets at this theater?
Consider a standard, downward-sloping, straight-line demand curve. As one moves from a high-price, low-quantity point down along the curve to a low-price, high-quantity point, what happens to the slope of the curve and the price elasticity of demand?
A company's market research team determines that the demand for its flagship product is price inelastic. The company's primary goal is to increase its total revenue. Based on this information, which pricing strategy should the company implement?
Two distinct, downward-sloping linear demand curves, D1 and D2, intersect at point E. At this point, curve D1 is steeper than curve D2. Which of the following statements is true regarding the price elasticity of demand at point E?
The slope of a demand curve is a more reliable measure of consumer responsiveness to price changes than the price elasticity of demand because the slope's value is constant along a straight-line demand curve.
Analyze the characteristics of each product listed below and match it with the description that best explains its likely price elasticity of demand.
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An economist is studying the demand for a specific brand of coffee. They calculate the price elasticity of demand between the prices of 12 and find a value of -1.5. They then calculate the price elasticity at the single point where the price is $10 and find a value of -1.3. What is the most likely reason for the difference between these two elasticity values?
Choosing the Right Elasticity Measure
When calculating the price elasticity of demand for a product, the arc elasticity method (measuring between two distinct prices) will always produce a different numerical result than the point elasticity method (measuring at a single price) because the arc method is an approximation over a range while the point method is precise.
Reconciling Elasticity Measures
Comparing Elasticity Calculation Methods
An economist is analyzing demand curves for different products. Match each scenario with the expected relationship between the arc elasticity (calculated over a price range) and the point elasticity (calculated at a specific price within that range).
When measuring the responsiveness of quantity demanded to a price change for a product represented by a straight-line demand curve, the value calculated between two different prices will be identical to the value calculated at a single, specific price. However, for a product with a ________ demand curve, these two measurement methods will typically produce different results.
An analyst is examining the demand for a product represented by a downward-sloping, straight-line demand curve. They calculate the arc price elasticity of demand between the prices of 20. They also calculate the point price elasticity of demand at the midpoint price of $15. How will the absolute values of these two elasticity calculations compare?
Explaining Elasticity Discrepancies
Evaluating Competing Elasticity Analyses