Arc Elasticity

50 20 18

eta

Defining Arc Elasticity

=
PercentChangeinQuantity PercentChangein Pr ice

60 64
Q

100
Arc Elasticity

Lectures in Microeconomics-Charles W. Upton

Defining Arc Elasticity

=
PercentChangeinQuantity PercentChangein Pr ice
Where: Percent change is measured as percent of average value
Arc Elasticity

Defining Arc Elasticity

=
PercentChangeinQuantity PercentChangein Pr ice
When P changes from 20 to 18, p = -2 Average value of P = 19 60 64
Q

50 20 18

50 20 18

60 64
Q

100

100 The % change is thus -2/19

Arc Elasticity

The Formula

The Formula

50 20 18 60 64
Q

Q1 Qo ( )(Q1 + Qo ) = P1 Po (1 1 + Po ) 2 )( P
1 2

50 20 18 60 64 100

Q1 Qo ( )(Q1 + Qo ) = P1 Po (1 1 + Po ) 2 )( P
1 2
Q
Arc Elasticity

100
Arc Elasticity

The Formula

The Formula

50 20 18 60 64
Q

Q1 Qo ( )(Q1 + Qo ) = P1 Po (1 1 + Po ) 2 )( P
1 2

50 20 18 60 64 100

Q1 Qo ( 1 )(Q + Qo ) = 2 1 P1 Po (1 1 + Po ) 2 )( P
Q
Arc Elasticity

100
Arc Elasticity

The Formula

An Example
Compute the arc elasticity when P changes from 20 to 18

50 20 18 60 64
Q

Q1 Qo ( 1 )(Q + Qo ) = 2 1 P1 Po 1 ( 2 )( P1 + Po )
100
Arc Elasticity

50 20 18 60 64
Q

100
Arc Elasticity

50 20 18 60 64
Q

An Example 60 64 ( 1 )(60 + 64) = 2 20 18 (1 2 )( 20 + 18)

100
Arc Elasticity

An Example 60 64 (1 2 )( 60 + 64 ) 4 = 50 20 18 62 = 2 20 (1 2 )( 20 + 18)
18

19

60 64
Q

100
Arc Elasticity

An Example 60 64 1 ( )(60 + 64) 4 = 2 50 20 18 62 = 1 2 20 ( 2 )( 20 + 18)

18

Reverse the Calculation

Compute the arc elasticity when P changes from 18 to 20

50 20 18 60 64
Q

19

60 64
Q

100

= -0.6129
Arc Elasticity

100
Arc Elasticity

Reverse the Calculation

Second Example
Compute the arc elasticity when P changes from 10 to 20

50 20 18 60 64
Q

= -0.6129

50 20 18

100
Arc Elasticity

60 64
Q

100
Arc Elasticity

Second Example = -4/7

Arc Elasticity and Tables

15,000 units were demanded when the price was $5. 12,000 units were demanded when the price was $7. Compute the elasticity
Arc Elasticity

50 20 18 60 64
Q

100
Arc Elasticity

Arc Elasticity and Tables

15,000 units were demanded when the price was $5. 12,000 units were demanded when the price was $7. Compute the elasticity

Arc Elasticity and Tables

15,000 units were demanded when the price was $5. 12,000 units were demanded when the price was $7. Compute the elasticity

Q1 Qo ( 1 )(Q + Qo ) = 2 1 P1 Po 1 ( 2 )( P1 + Po )

Arc Elasticity

Q1 Qo (1 )( Q + Qo ) = 2 1 P1 Po (1 )( 1 + P o) 2 P 3000 13,500 = 2 6 Arc Elasticity

Arc Elasticity and Tables

15,000 units were demanded when the price was $5. 12,000 units were demanded when the price was $7. Compute the elasticity

Arc Elasticity and Tables

15,000 units were Q1 Qo demanded when the 1 ( )( Q + Qo ) price was $5. = 2 1 P1 Po 12,000 units were (1 )( demanded when the 1 + P o) 2 P price was $7. 3000 Note that we never said Compute the 13,500 =came first. elasticity which price 2 6 Arc Elasticity

2 = 3

Q1 Qo ( )(Q1 + Qo ) = P1 Po (1 )( 1 + P o) 2 P 3000 13,500 = 2 6 Arc Elasticity

1 2

2 = 3

Which method is best?

The concept of elasticity is defined without reference to any one method of calculation.

Which method is best?

The concept of elasticity is defined without reference to any one method of calculation. There are occasions when the point elasticity formula is best and there are occasions when the arc elasticity formula is best.

Arc Elasticity

Arc Elasticity

Which method is best?

The concept of elasticity is defined without reference In to any one we method of use calculation. general tend to There are point occasions when the point elasticities in class, elasticity formula is best and there because we have the are occasions luxury when the arc elasticity formula is of examples with best. nice demand curves.

Extensions to other Elasticities

Income elasticities (measuring the responsiveness of demand with respect to changes in income).

Arc Elasticity

Arc Elasticity

Extensions to other Elasticities

Income elasticities (measuring the responsiveness of demand with respect to changes in income). Own price elasticities measuring the responsiveness of demand with respect to changes in the price of the good itself.

Extensions to other Elasticities

Income elasticities (measuring the responsiveness of demand with respect to changes in income). Own price elasticities measuring the responsiveness of demand with respect to changes in the price of the good itself. Cross price elasticities (measuring the responsiveness of demand with respect to the price of other goods).
Arc Elasticity

Arc Elasticity

End
2004 Charles W. Upton

Arc Elasticity