The Journey of Arc Elasticity: Unveiling the Flexibility of Economics

Learn about arc elasticity and its importance in economics. Discover how this measure helps analyze the responsiveness of demand or supply to price changes across a specific range. Master the concepts and calculation methods to effectively apply arc elasticity in economic analysis and decision-making.

Arc Elasticity

Introduction

Arc elasticity is a concept used in economics to measure the elasticity of a change in one variable (usually quantity) with respect to another variable (often price) over an intermediate range of values. It provides more precise measurement since it takes into account the change in both the dependent and independent variables within a specific range.

Calculation

The formula for arc elasticity is as follows:

Arc elasticity = (?X / (X1<sub> + X2)) / (?Y / (Y1 + Y2))

Where:

• ?X is the change in the quantity of a good or service.
• X₁ is the initial quantity of the good or service.
• X₂ is the final quantity of the good or service.
• ?Y is the change in price.
• Y₁ is the initial price.
• Y₂ is the final price.

Interpretation

Arc elasticity value helps to determine whether the two variables have a positive or negative relationship and the magnitude of their relationship.

• If arc elasticity is greater than 1, it indicates a relatively elastic relationship, meaning a small change in price causes a larger percentage change in quantity demanded or supplied.
• An arc elasticity value less than 1 represents a relatively inelastic relationship, in which changes in price have a smaller proportional effect on quantity.
• An arc elasticity of exactly 1 suggests a unitary elastic relationship, meaning proportionate changes in price have equal impact on quantity demanded or supplied.
• If the elasticity is zero, it implies no relationship, i.e., the change in price does not affect the quantity variable at all.

Uses

Arc elasticity is often employed in demand and supply analysis, pricing decisions, market research, and econometrics. This measurement helps economists and policymakers understand the responsiveness of various economic variables, enabling better decision-making and policy formulation.

Previous term: Arbitrageur