Changes

'''Arc elasticity of demand''' calculates the elasticity by using the average overall values for [[price]] and [[quantities]] as the respective denominator in calculating the elasticities.

The '''arc elasticity of demand''' calculates the elasticity by using the average overall values for [[price]] and [[quantities]] as the respective denominator in calculating the elasticities. The arc elasticity may also be referred to, as in Mankiw's text, as the price elasticity of demand calculated using the '''midpoint method'''.

There is an ambiguity in calculating the percentage change in price or quantity in calculating elasticity of demand. What should be used as the denominator in deriving the percentages? If $100 increases to $110, then the percent change could be described as $10/$100 x 100% or $10/$110 x 100%. Above we used the initial price and quantity as the denominator, but we could have used the final price and quantity as the denominator instead.

There is an ambiguity in calculating the percentage change in price or quantity in calculating elasticity of demand. What should be used as the denominator in deriving the percentages? If $100 increases to $110, then the percent change could be described as $10/$100 x 100% or $10/$110 x 100%. Above we used the initial price and quantity as the denominator, but we could have used the final price and quantity as the denominator instead.

Economists resolve this by typically using the “arc elasticity” because it is a more accurate depiction of the “arc” or curve of demand.

Economists resolve this by typically using the “arc elasticity” because it is a more accurate depiction of the “arc” or curve of demand. That is, rather than using 100 or 110 as the denominator, the average (or midpoint) would be used - the elasticity would be measured (10/105)x100%.

[[Category:Economics]]

[[Category:Economics]]