Question

The ________ approach for calculating elasticity makes for simple math, but is not as accurate.

A) The point elasticity approach

B) The midpoint (arc) elasticity approach

C) The percent change approach

Answer 1

Answer - a) The point elasticity approach

Explanation -

In the given diagram, if we calculate the point elasticity of the price change from A to B and from B to A, we should get the same answer, but that does not happen.

A to B

PED = [(Q2-Q1)/Q1] / [(P2-P1)/P1] = [(10-8)/8] / [(2-4)/4] = 0.25/ (-0.5) = -0.5

B to A

PED = [(Q2-Q1)/Q1] / [(P2-P1)/P1] = [(8-10)/10] / [(4-2)/2] = (-0.2)/1 = -0.2

We see that the price elasticity of demand differs for the same price change, hence the point elasticity approach is not accurate but easy to calculate