Point elasticity

Point elasticity
See also
Book to market ratio Capacity analysis Parametric analysis Budget line Evaluation criteria Capture rate Perfect information Differential costing Mixed cost

Point elasticity measures elasticity at a given dot on a facility. The point elasticity conception is used to mete the effect on an appurtenant variable, Y, of a very little or accessory alteration in an independent variable, X. The concept of point elasticity is used when we want to know relative price elasticity of demand at a given point on the demand curve to make some decisions about price variation. Dominick Salvatore defines point elasticity of demand as .:

• The price elasticity of demand at a detail dot on the need curve.

Definition

The source of Economics for Business and Management indicates that this term “is a measure of the price elasticity of demand at a single point (i.e. single price and quantity situation) on a demand curve” . The author states that the utility of the curve is most beneficial when the curve presenting the demand level is not a straight line. Generally, the point elasticity is described as the ratio between the demanded number of goods and the price modification expressed in percentage .

Example

To elaborate an example; when the demand elasticity is to be calculated, in case of commodities with the decreasing demand curve, the output of the calculation is always to be negative. Graphical presentation consists of the points, which are placed on the graph. There are two methods to calculate a value of the indicator: linear and non-linear demand curve. In some specific cases, it is hard to decide whether it is more profitable to change the price or not, which particularly depends on commodity cost and total impact on the revenue. It is also allowable, under specific conditions, that the elasticity goes infinite or aims for zero.

John Beardshaw in his Economics, A Student's Guide describes the point elasticity as “the value of price elasticity at any one point on the curve”. Point elasticity is the price elasticity of demand at a specific point on the demand curve instead of over a range of the demand curve. It uses the same convention as the universal price elasticity of demand measure, but we can have information from the demand equalization to solve for the “change in” values instead of actually calculating a change given two points. The curve is expressed by an equation .: $ED={\frac {P}{Q}}x{\frac {dQ}{dP}}$

• dQ/dP – deritvative of quantity with respect to price,
• P – price and Q – quantity.

The calculation of point elasticity is executed in the cases, where the stakeholders want to find out the comparative price elasticity of demand and localize this value on the demand curve. Practically, it highly supports decision-making process in regards to prices and their variation on the market .

Advantages of Point elasticity

The use of point elasticity has several advantages, including:

• Its ability to measure the effect of a small change in the independent variable on the dependent variable. This allows for a more accurate measure of elasticity than other methods, as it can measure the change in the dependent variable at a specific point on the demand curve.
• It can be used to make decisions about pricing, allowing businesses to tailor prices to different customers and market conditions.
• It can also be used to measure the responsiveness of different markets to changes in factors such as price and income. This allows businesses to adjust their strategies accordingly and maximize their profits.
• Point elasticity can also be used to measure the effect of changes in one variable on another, such as the effect of a change in price on the quantity demanded.

Limitations of Point elasticity

Point elasticity of demand is a useful tool in economics to measure the responsiveness of demand to a change in price. However, it has certain limitations. These include:

• Point elasticity measures the responsiveness of demand only at a single point on the demand curve. It fails to take into account changes in demand due to shift in the entire demand curve, which is a more realistic measure of elasticity.
• Point elasticity fails to measure the effect of a change in price on the total revenues of a firm, as it is limited to measuring the percentage change in the quantity demanded.
• Point elasticity also fails to take into account the different effects of price changes over different ranges of prices. It assumes that the effect of a price change is the same across all prices.
• Point elasticity also fails to take into account the time lag between changes in price and the response of consumers. This can lead to inaccurate predictions of consumer behavior.

Other approaches related to Point elasticity

Point elasticity is related to several other approaches which can be used to measure elasticity of demand for a given product. These approaches include:

• Price Elasticity of Demand (PED): This measures the responsiveness of demand for a good when the price changes. It is calculated by dividing the percentage change in quantity demanded by the percentage change in price.
• Income Elasticity of Demand (YED): This measures the responsiveness of demand for a good when income changes. It is calculated by dividing the percentage change in quantity demanded by the percentage change in income.
• Cross-Price Elasticity of Demand (XED): This measures the responsiveness of demand for a good when the price of another good changes. It is calculated by dividing the percentage change in quantity demanded by the percentage change in price of another good.
• Time Elasticity of Demand (TED): This measures the responsiveness of demand for a good when the time period changes. It is calculated by dividing the percentage change in quantity demanded by the percentage change in time period.

In summary, point elasticity is related to several other approaches which can be used to measure the elasticity of demand for a given product. These approaches include Price Elasticity of Demand (PED), Income Elasticity of Demand (YED), Cross-Price Elasticity of Demand (XED), and Time Elasticity of Demand (TED).

References

• Beardshaw J., (2001), Economics A Student’s Guide, Pearson Education, New York, p. 72
• Griffiths A., Wall S., (2008), Economics for Business and Management,Pearson Education, Cambridge p. 55
• Hirschey M., Bentzen E., (2016), Fundamentals of Managerial Economics, Cengage Learning, Kansas, p. 132

Author: Dominika Tatoń