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How is price elasticity of supply computed by arc method?

How is price elasticity of supply computed by arc method?

Solution

The arc method computes the price elasticity of supply between two points on the supply curve by using the averages (midpoints) of the two prices and two quantities as the base, instead of the initial values.

  1. Formula: Es = [ΔQ / (Q₁ + Q₂)] ÷ [ΔP / (P₁ + P₂)], where ΔQ and ΔP are the changes in quantity and price and (Q₁, Q₂) and (P₁, P₂) are the two quantities and two prices.
  2. Why it is used: because it takes the midpoint as the base, it gives the same elasticity value whether we move up or down the curve, making it preferable to the percentage method when price and quantity change by large amounts.

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