The point method of measuring price elasticity of demand is not very realistic since demand schedules with minute changes in prices and quantities demanded are rarely available. In reality we nay come across demand schedules that have gaps in prices as well as in quantities. The most satisfactory solution is the use of the mid points between the old and the new figures in the case of both price and quantity demanded. This method of measurement is known as arc elasticity as different from point elasticity. Arc signifies a segment or portion of a curve between two points. The formula for measuring the arc elasticity is:
; In Which
Q= Original quantity demanded
Q1= New quantity demanded
P= Original price
P1= New price
Let us take a concrete example to explain the arc method. The demand for a commodity was 2,000 units per week when the price was Rs. 5/- per unit the demand contracted to 2500 units when price was raised from Rs. 5/- to Rs. 10/- per unit.
The formula to calculate elasticity of demand by arc method is:
Substituting the figures in the above equation
Elasticity is – =. 6
Negative sign in elasticity coefficient represents the reciprocal relation between price and quantity.