Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What defines point elasticity of demand?

1. The overall elasticity over a range of prices

2. Elasticity calculated at a specific point without averages

3. The average elasticity across various points

4. The elasticity influenced by external economic factors

The correct answer is: Elasticity calculated at a specific point without averages

Point elasticity of demand is calculated at a specific point on the demand curve, rather than over a range of prices or across averages. This approach allows for a precise measurement of how much the quantity demanded of a good responds to a small change in its price at that particular point. The formula for point elasticity is expressed as the percentage change in quantity demanded divided by the percentage change in price, using the derivative of the demand function. This calculation provides a more accurate understanding of the responsiveness of demand in relation to changes in price, reflecting the exact slope of the demand curve at that specific level of price and quantity. By focusing solely on a specific point, this method avoids the averaging method used in arc elasticity, which calculates elasticity over a broader price range. This focused analysis is particularly useful for businesses when determining pricing strategies or anticipating consumer behavior in response to small shifts in price.