Geometric or Point method of price elasticity of demand

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 Learning Contents:                                                            

·           Understanding Geometric Method of Price Elasticity of Demand

Introduction:

Prof. Marshall suggested the geometric method for finding the price elasticity of demand that measures elasticity at any point on the demand curve. This method is normally used when the price change is so small that the initial price and the changed price can be represented by the same point on the price axis under the rule of approxima­tion. The value of elasticity comes out to be different at different points on the same demand curve. It is also called a point or graphic method of measuring the elasticity of demand.

The elasticity of demand is measured by dividing the length of the lower segment of the demand curve with the length of the upper segment of the demand curve at that point on the demand curve. Value of Ed is unity or 1 at the midpoint of the linear demand curve. The formula used to calculate the price elasticity is:


How the elasticity of demand is different on the straight-line demand curve?

The different degrees of elasticity of demand on the same demand curve can be understood with the help of a straight-line demand curve having points A, B, C, D, and E is explained through Figure 1.

























Hence, we conclude that elasticity at mid-point of a straight-line demand curve will be 1, elasticity at every point below the mid-point but to the right of the midpoint will have less than unitary elastic and elasticity at every point above the mid-point but, to the left of the midpoint will be greater than one.

 

Learning through a simple example:

Using the Geometric method,  we will calculate the different degrees of elasticity of demand at different points on the demand curve by assuming that the length of the demand curve is 12 cm.















1. What will be the elasticity of demand at point C or midpoint of the demand curve?

Solution:  At point C, Ed= Lower segment/ Upper Segment = CE/CA = 6/6 =1(Unitary Elastic)

2. What will be the elasticity of demand at point D?

Solution:  At point D, Ed= Lower segment/ Upper Segment = DE/DA = 3/9 =0.33 (Inelastic Demand)

3. What will be the elasticity of demand at point B?

Solution:  At point B, Ed= Lower segment/ Upper Segment = BE/BA = 9/3 =3 (Elastic Demand)

4. What will be the elasticity of demand at point A?

Solution:  At point A, Ed= Lower segment/ Upper Segment = AE/0 = 12/0 = ∞ (infinity or not defined)

5. What will be the elasticity of demand at point E?

Solution:  At point A, Ed= Lower segment/ Upper Segment =0/AE = 0/12= 0 (Zero)

 

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