Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is point elasticity of demand?

1. The elasticity calculated using two points on the demand curve

2. The price elasticity at a specific point on the demand curve

3. The average elasticity of all points on the demand curve

4. The relationship of demand to average income levels

The correct answer is: The price elasticity at a specific point on the demand curve

Point elasticity of demand refers to the measurement of price elasticity at a specific point on the demand curve. This concept is used to understand how the quantity demanded of a good or service responds to a change in price at that exact point. Essentially, it captures the sensitivity of demand to price changes when considering very small changes in price and quantity, providing a precise measure of elasticity. In practice, this is particularly useful for firms and economists because it allows them to determine how changes in price will impact the demand for a product right at a certain price level. By applying the formula for point elasticity, which is the percentage change in quantity demanded divided by the percentage change in price, one can assess the responsiveness of consumers at that specific point, making this measure quite valuable for pricing decisions and economic analyses. Other options do not accurately describe point elasticity. For instance, calculating elasticity using two points on the curve refers to arc elasticity, while averaging all points on the curve does not provide the precise measurement that point elasticity does. Similarly, the relationship of demand to average income levels is unrelated to the concept of elasticity with respect to price changes.