Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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What does arc elasticity of demand measure?

The elasticity of demand at a single point
The elasticity of demand across a large interval on the demand curve
The average elasticity of demand over an extended period
The point elasticity of demand for perfect competition

The correct answer is: The elasticity of demand across a large interval on the demand curve

Arc elasticity of demand measures the elasticity of demand across a large interval on the demand curve, making it particularly useful for analyzing the responsiveness of quantity demanded to changes in price over a range of price and quantity levels. This is important because it allows for a more comprehensive understanding of how demand changes when prices fluctuate significantly, rather than just focusing on small changes at a single price point. The calculation of arc elasticity involves using the average values of quantity and price before and after a change, which captures the total effect over that interval rather than at an infinitesimally small point. This characteristic makes arc elasticity a valuable tool in various situations, such as assessing the impact of price adjustments or understanding consumer behavior over a broader context. The other options focus on narrower scopes of elasticity measurement or specific market conditions which do not encompass the comprehensive nature of arc elasticity.