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We cannot apply the concept of arc elasticity to large changes.Īnother argument for considering only small changes in computing price elasticities of demand will become evident in the next section. The fact that arc elasticities are approximate suggests an important practical rule in calculating arc elasticities: we should consider only small changes in independent variables. For a precise computation of elasticity, we would need to consider the response of a dependent variable to an extremely small change in an independent variable. It gives the value of elasticity at the midpoint over a range of change, such as the movement between points A and B. The arc elasticity method gives us an estimate of elasticity. The price elasticity of demand for a good or service, e D, is the percentage change in quantity demanded of a particular good or service divided by the percentage change in the price of that good or service, all other things unchanged. To show how responsive quantity demanded is to a change in price, we apply the concept of elasticity. But how much will it change? It seems reasonable to expect, for example, that a 10% change in the price charged for a visit to the doctor would yield a different percentage change in quantity demanded than a 10% change in the price of a Ford Mustang. We know from the law of demand how the quantity demanded will respond to a price change: it will change in the opposite direction. Discuss the determinants of price elasticity of demand.Understand the relationship between total revenue and price elasticity of demand.Explain how and why the value of the price elasticity of demand changes along a linear demand curve.Explain what it means for demand to be price inelastic, unit price elastic, price elastic, perfectly price inelastic, and perfectly price elastic.Explain the concept of price elasticity of demand and its calculation.