Authors libby rittenberg 236

The price elasticity of demand between points A and B is thus:
eD = (20,000/(40,000 + 60,000)/2)
-$0.10/($0.80 + $0.70)/2
=40%/(-13.33%)=-3.00
With the arc elasticity formula, the elasticity is the same whether we move
from point A to point B or from point B to point A. If we start at point B and
move to point A, we have:
eD = -20,000/(60,000 + 40,000)/2
0.10/($0.70 + $0.80)/2
= -40%13.33% = -3.00
The arc elasticity method gives us an estimate of elasticity. It gives the
value of elasticity at the midpoint over a range of change, such as the
movement between points A and B. For a precise computation of elasticity,
we would need to consider the response of a dependent variable to an
extremely small change in an independent variable. The fact that arc
elasticities are approximate suggests an important practical rule in
calculating arc elasticities: we should consider only small changes in
independent variables. We cannot apply the concept of arc elasticity to
large changes.
Another argument for considering only small changes in computing price
elasticities of demand will become evident in the next section. We will
investigate what happens to price elasticities as we move from one point
to another along a linear demand curve.

Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org

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