Arc Elasticity of Demand
Definition: Arc elasticity of demand measures the elasticity at the midpoint between two points on a curve.
Formula for Average of 'midpoint' elasticity of demand
(change in Q / average Q )
---------------------------
(change in P / average P)
or:
Arc elasticity measures elasticity at the mid point between the two selected points:
Example of Arc Elasticity of Demand:
- Price increases from 10p to 12p.
- Quantity falls from 40 to 20.
- Mid point of price = (12+10) / 2 = 11
- Mid point of quantity = (40+20) / 2 = 30
PED = % change Q.D/ % change in price
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
Example of Difference between Point and Arc Elasticity A to B
Point elasticity A to B
- Quantity increase from 200 to 300 = 100/200 = 50%
- Price falls from 4 to 3 = 1/4 = -25%
- Therefore PED = 50/ -25 = – 2.0
Arc (Mid Point) Elasticity A to B
- Mid point of Q = (200+300) / 2 = 250
- Mid Point of P = (3+4) / 2 = 3.5
- Q % = (100/250) = 40%
- P % = 1/3.5 = 28.57
- PED = 40/-28.57 = - 1.4
(or ( 3.5/250) * 100/1 = - 1.4)
Related Essays and Revision Notes
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Economics Dictionary
- Economics Dictionary at Amazon UK
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