Defining Arc Elasticity

η
Arc Elasticity PercentChangeinQuantity
η=
50 PercentChangein Pr ice
20
18
“eta”
60 64 100
Lectures in Microeconomics-Charles W. Upton
Q Arc Elasticity

Defining Arc Elasticity Defining Arc Elasticity

P P
PercentChangeinQuantity
η=
PercentChangeinQuantity PercentChangein Pr ice
η=
50 PercentChangein Pr ice 50
When P changes from 20 to
20 Where: 20 18, ∆p = -2
18 Percent change is 18 Average value of P = 19
measured as percent of
60 64 100 average value 60 64 100 The % change is thus -2/19
Q Arc Elasticity
Q Arc Elasticity

The Formula The Formula

P P

Q1 − Qo Q1 − Qo
50 ( )(Q1 + Qo ) 1
50 ( )(Q1 + Qo ) 1
η= 2
η= 2

20 P1 − Po 20 P1 − Po
18 18
( 12 )( P1 + Po ) ( 12 )( P1 + Po )
60 64 100 60 64 100
Q Arc Elasticity
Q Arc Elasticity

1
 The Formula The Formula
P P

Q1 − Qo Q1 − Qo
50 ( )(Q1 + Qo )1
50 ( 1 )(Q + Qo )
η= 2
η= 2 1
20 P1 − Po 20 P1 − Po
18 ( 12 )( P1 + Po ) 18
( 12 )( P1 + Po )
60 64 100 60 64 100
Q Arc Elasticity
Q Arc Elasticity

The Formula An Example

P P

Q1 − Qo
Compute the arc
50 ( 1 )(Q + Qo ) 50 elasticity when P
η= 2 1 changes from 20 to 18
20 P1 − Po 20
18 18
( 2 )( P1 + Po )
1

60 64 100 60 64 100
Q Arc Elasticity
Q Arc Elasticity

An Example An Example
P P
60 − 64 60 − 64
( 1 )(60 + 64) 4 ( 12 )(60 + 64)
η= 2 − η =
50 20 − 18 50 62 20 − 18
η =
20 ( 12 )( 20 + 18) 20 2 ( 12 )( 20 + 18)
18 18 19
60 64 100 60 64 100
Q Arc Elasticity
Q Arc Elasticity

2
 An Example Reverse the Calculation
P P
60 − 64
4 ( )(60 + 64)
1
Compute the arc
− η= 2
50 62 20 − 18 50 elasticity when P
η = changes from 18 to 20
20 2 ( 2 )( 20 + 18)
1
20
18 19 18
η = -0.6129
60 64 100 60 64 100
Q Arc Elasticity
Q Arc Elasticity

Reverse the Calculation Second Example

P P

η = -0.6129 Compute the arc

50 50 elasticity when P
20 20
changes from 10 to 20
18 18

60 64 100 60 64 100
Q Arc Elasticity
Q Arc Elasticity

Second Example Arc Elasticity and Tables

P
• 15,000 units were
demanded when the
η = -4/7 price was $5.
50
• 12,000 units were
20 demanded when the
18 price was $7.
• Compute the
60 64 100 elasticity
Q Arc Elasticity Arc Elasticity

3
 Arc Elasticity and Tables Arc Elasticity and Tables
• 15,000 units were • 15,000 units were
demanded when the Q1 − Qo demanded when the
Q1 − Qo
( 12 )(Q1 + Qo )
price was $5.
( 1 )(Q + Qo ) price was $5. η=
P1 − Po
• 12,000 units were η= 2 1 • 12,000 units were
demanded when the P1 − Po demanded when the ( 12 )( P1 + Po )
price was $7. price was $7. − 3000
• Compute the ( 2 )( P1 + Po )
1
• Compute the 13,500
elasticity elasticity η=
2
Arc Elasticity Arc Elasticity 6

Arc Elasticity and Tables Arc Elasticity and Tables

• 15,000 units were Q1 − Qo • 15,000 units were Q1 − Qo
demanded when the demanded when the
( )(Q1 + Qo )
1
( 1
)( Q + Qo )
price was $5. η= 2 price was $5. η= 2 1
−2
• 12,000 units were P1 − Po
−2
• 12,000 units were P1 − Po

η=
demanded when the
price was $7.
( 12 )( P1 + Po )
η=
demanded when the
price was $7.
( 12 )( P1 + Po )

3
• Compute the
η=
− 3000
13,500 3
• Compute the Note that we never
− 3000
13,500said
η =came first.
elasticity elasticity which price
2 2
Arc Elasticity 6 Arc Elasticity 6

Which method is best? Which method is best?

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

4
 Which method is best? Extensions to other Elasticities
• The concept of elasticity is defined without • Income elasticities (measuring the
reference In
to any one we
general method of use
tend to calculation. responsiveness of demand with respect to
• There are point
occasions when the
elasticities point
in class, changes in income).
elasticity formula
becauseis best and there
we have the are
occasions luxury
when the arc elasticity
of examples withformula is
best. nice demand curves.

Arc Elasticity Arc Elasticity

Extensions to other Elasticities 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.
• 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