  Friday  February 28, 2020
 AmosWEB means Economics with a Touch of Whimsy! MARKET SHOCK: A disruption of market equilibrium (that is, a market adjustment) caused by a change in a demand determinant (and a shift of the demand curve) or a change in a supply determinant (and a shift of the supply curve). A market shock can take one of four forms--an demand increase, demand decrease, supply increase, or supply decrease. An increase is seen as a rightward shift of either curve and results in an increase in equilibrium quantity. A decrease is a leftward shift of either curve and results in a decrease in equilibrium quantity. However, a change in demand results in price and quantity to change in the same direction, while a change in supply causes equilibrium price to move the opposite direction as quantity.                              ARC ELASTICITY:

The average elasticity for discrete changes in two variables. The distinguishing characteristic of arc elasticity is that percentage changes are calculated based on the average of initial and ending values of each variable, rather than initial values. Arc elasticity is generally calculated using the midpoint elasticity formula. The contrast to arc elasticity is point elasticity. For infinitesimally small changes in two variables, arc elasticity is the same as point elasticity.
Arc elasticity is best considered the average elasticity over a range of values for a relation. Like any average, some values within the range are likely to be greater and some less. However, it provides a quick approximation of elasticity when more precise and sophisticated calculation techniques are not possible.

### Working Through an Example

A Standard Demand Curve The demand curve displayed to the right can be used to illustrate the measurement of arc elasticity using the midpoint elasticity formula. If the price declines from \$12 to \$8, the quantity demanded increases from 4 to 6, from point X to point Z. Using this midpoint formula (with price designated as P and quantity designated as Q) average price elasticity of demand is:
 midpointelasticity = (Q[Z] - Q[X])(Q[Z] + Q[X])/2 ÷ (P[Z] - P[X])(P[Z] + P[X])/2

 midpointelasticity = (6 - 4)(6 + 4)/2 ÷ (8 - 12)(8 + 12)/2 = (2)(5) ÷ (-4)(10)

 midpointelasticity = 0.4 ÷ -0.4 = -1

Ignoring the minus sign, the price elasticity of demand over this segment of the demand curve from X to Z is 1.0.

### An Average Value

This value of 1.0 is actually an average for the entire range between points X and Z. Precise estimates of point elasticity shows that the elasticity is 0.67 at point X and 1.5 at point Z. Moreover, the elasticity is different at each point on a straight line demand curve such as this one. The only point in which the elasticity is exactly equal to 1.0 is at point Y, the midpoint between X and Z.

This last observation is worth emphasizing. The midpoint elasticity formula effectively estimates the point elasticity at the very midpoint of the overall segment. This means that the elasticity of any point on a demand curve (point elasticity) can be obtained by calculating the arc elasticity with the midpoint elasticity formula such that the desired point is dead center in the middle, the midpoint of the arc.

 <= AMERICAN ECONOMIC ASSOCIATION ASSUMPTION => Recommended Citation:

ARC ELASTICITY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2020. [Accessed: February 28, 2020].

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