Geometrical Method: Point Elasticity
This method tells us how to measure elasticity of demand at any point on a demand curve. The demand curve in Fig. 11.12. 00 is ‘the straight line demand curve. Elasticity is represented by the fraction: distance from 0 to a point on the curve divided by the distance from the other end to that point. Thus, elasticity of demand on the points PI’ 1-‘2 and P3 respectively.
The words of Baumel. Arc elasticity is a measure of the average responsiveness to price changes exhibited by a demand curve over some finite stretch of the curve.” Any two points on a demand curve make an arc. The area between P and M on the DO curve an arc which measures elasticity over a certain range of prices and quantities.
There is another drawback if we measure elasticity by the slope of the curve. Take two commodities, say wheat and radio sets. A five-rupee fall in the price of wheat may increase the demand by 5 lakh acquittals but a 5 -rupee fall in tic price of a radio set may increase the demand by 25 sets only. This does not mean that the demand for wheat is more responsive to tic change in price than radio acts. The reason is that a 5 -Rupert fall in the price of wheat is a big change whet fall in the price of a radio set is insignificant. Also, there is no basis for comparison between a unit of wheat and a unit of radio sets.
Slope Indicating Elasticity. We can. however, conceive of one case where the relative elasticity of two curves can be known from their respective slopes. Suppose there are two curves, AB and CD, representing the demand for the same good ill separate markets as shown in the following diagram.
Then elasticity of demand at the point R is.
The concept of elasticity of demand is of great practical importance in the sphere of government finance as well as in trade and commerce