Harness Money

What is arc elasticity?

Arc elasticity, also known as the midpoint elasticity, is a measure of the responsiveness or sensitivity of the quantity demanded or supplied of a good to a change in its price. It calculates the percentage change in quantity relative to the average of the initial and final quantities and the percentage change in price.

The formula for arc elasticity is:

Arc Elasticity = ((Q2 – Q1) / ((Q2 + Q1) / 2)) / ((P2 – P1) / ((P2 + P1) / 2))

Where:

Q1 and Q2 represent the initial and final quantities of the good.

P1 and P2 represent the initial and final prices of the good.

Arc elasticity accounts for changes in both price and quantity, providing a more accurate measure of responsiveness compared to point elasticity, which only considers infinitesimally small changes.

The arc elasticity coefficient indicates the magnitude and direction of the responsiveness. If the coefficient is greater than 1, the demand or supply is elastic, meaning that a percentage change in price leads to a larger percentage change in quantity. If the coefficient is less than 1, the demand or supply is inelastic, indicating that a percentage change in price results in a smaller percentage change in quantity. When the coefficient is exactly 1, the demand or supply is unitary elastic, indicating proportional responsiveness.

Arc elasticity is commonly used in economics to analyze consumer behavior, producer decisions, and market dynamics. It helps in understanding how sensitive the demand or supply of a good is to changes in price, which is crucial for decision-making and policy analysis.