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 Demand and Supply Applications and... Appendix: Point Elasticity

The price elasticity of demand can be calculated at a point on a demand curve (instead of between two points).

To perform the calculation:

1. Be sure that the demand curve intersects both axes.

2. Determine the point at which the elasticity is to be measured; drop a perpendicular line from that point to the horizontal axis.

3. Notice that, as in Figure 4A.1, the horizontal axis from the origin to the horizontal intercept of the demand curve is now divided (by the perpendicular) into two line segments.

4. Find the lengths of the two line segments: the one from the origin to the perpendicular, (labeled in the figure as M2) and the other from the perpendicular to the horizontal intercept of the demand curve (labeled in the figure as M1).

5. Divide the length of M1 by the length of M2.

6. The result is the value of the elasticity at that point.

Notice how this corresponds to what we already know about the pattern of elasticity along a straight-line demand curve. For points on the demand curve close to the vertical axis such as B in Figure 4A.2, M1 will be longer than M2 and the elasticity will therefore be greater than one. For points on the demand curve close to the horizontal axis such as A in Figure 4A.2, M1 will be shorter than M2 and the elasticity will therefore be less than one. At the midpoint, the two segments will have equal length and the elasticity will be unitary.

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