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: http://www.saylor.org/books/ Saylor.org 237