Definition: Arc elasticity of demand measures elasticity between two points on a curve.
On most curves the elasticity of a curve varies depending upon where you are. Therefore elasticity needs to measure a certain sector of the curve.
Calculating Arc Elasticity of Demand
To calculate arc elasticity of demand we take the midpoint in between
Example of Arc Elasticity of Demand:
- Price increases from 10p to 12p.
- Quantity falls from 40 to 20.
- Arc elasticity of demand assumes that we should calculate using the midpoint between 40 and 20 which equals 30
The % change in quantity is 20/ 30 = – 0.667
The % change in price is 2p / 11 = 0.18
Therefore PED = -0.667 / 0.18 = -3.7
Formula for Average of ‘midpoint’ elasticity of demand
(change in Q / average Q )
(change in P / average P)