Difference between revisions of "Arc elasticity of demand"

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The '''arc elasticity of demand''' is a way of accurately calculating [[elasticity]] and is also known as the '''midpoint method''' (for example in [[Greg Mankiw]]'s introductory texbook).
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The '''arc elasticity of demand''' is a way of accurately calculating [[elasticity]] and is also known as the '''midpoint method'''.
  
 
Elasticity measures percentage change in one variable (usually quantity demanded) in response to a percentage change in another variable (usually price):
 
Elasticity measures percentage change in one variable (usually quantity demanded) in response to a percentage change in another variable (usually price):

Revision as of 22:27, 22 November 2012

The arc elasticity of demand is a way of accurately calculating elasticity and is also known as the midpoint method.

Elasticity measures percentage change in one variable (usually quantity demanded) in response to a percentage change in another variable (usually price):


This creates an ambiguity because the same change, in different directions, would yield a different percentage change. For example, suppose that at price 9, 105 widgets are demanded; at price 10, 100 widgets are demanded; and at price 11, 95 units are demanded. Then, if the price rises from 9 to 11,



while the price falling from 11 to 9 yields


Economists resolve this by averaging the endpoints to use the midpoint between the two endpoints; that is,


The elasticity measured from 9 to 11 is then the same as the elasticity measured from 11 to 9.