Authors libby rittenberg 237

Heads Up!
Notice that in the arc elasticity formula, the method for computing a
percentage change differs from the standard method with which you may
be familiar. That method measures the percentage change in a variable
relative to its original value. For example, using the standard method,
when we go from point A to point B, we would compute the percentage
change in quantity as 20,000/40,000 = 50%. The percentage change in
price would be −$0.10/$0.80 = −12.5%. The price elasticity of demand
would then be 50%/(−12.5%) = −4.00. Going from point B to point A,
however, would yield a different elasticity. The percentage change in
quantity would be −20,000/60,000, or −33.33%. The percentage change in
price would be $0.10/$0.70 = 14.29%. The price elasticity of demand
would thus be −33.33%/14.29% = −2.33. By using the average quantity
and average price to calculate percentage changes, the arc elasticity
approach avoids the necessity to specify the direction of the change and,
thereby, gives us the same answer whether we go from A to B or from B to
A.

Price Elasticities Along a Linear Demand Curve
What happens to the price elasticity of demand when we travel along the
demand curve? The answer depends on the nature of the demand curve
itself. On a linear demand curve, such as the one in Figure 5.2 "Price
Elasticities of Demand for a Linear Demand Curve", elasticity becomes
smaller (in absolute value) as we travel downward and to the right.

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

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