Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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What is arc elasticity of demand?

The elasticity measured at a point on the curve
Elasticity calculated using endpoints of the demand curve
The relationship of demand between two points using averages
The average price elasticity over a range of output

The correct answer is: The relationship of demand between two points using averages

Arc elasticity of demand refers to the responsiveness of quantity demanded to a change in price over a specific segment of the demand curve, typically between two distinct points. This calculation uses the average values of both price and quantity at the two endpoints of the arc, which allows for a more accurate measurement of elasticity, especially when the price changes are significant. By using averages, arc elasticity recognizes the differences in the price and quantity at both points while providing a more representative figure for the elasticity over that range. This method contrasts with point elasticity, which measures elasticity at a specific point on the curve, and other methods that may not adequately account for the overall change between two points. Hence, this understanding of arc elasticity helps to analyze consumer behavior and price sensitivity more effectively over larger price changes, making it a vital concept in economics and for businesses in strategy formulation.