The Arc Elasticity of Demand: A Note and Comment

In this journal, Seldon (1986) recently criticized the arc elasticity concept as it is commonly taught in the principles course. In doing so, he resurrected the Lerner (1933a) measure of elasticity, which is based upon the lower values of price and quantity in a price change rather than the average values used in the traditional measure (i.e., the midpoint formula). Seldon argued that the Lerner measure is appropriate for the pedagogy of the principles course because it is more conducive to a graphical interpretation of the revenue impacts accompanying price changes. In this article, I further examine the suitability of the traditional arc elasticity measure for the principles curriculum. I demonstrate that the midpoint measure is subject to an inherent shortcoming because it invariably tends to approach one as price changes become large. For this reason, the arc elasticity measure may indicate no change in total revenue when, in fact, total revenue increases or decreases. The analysis strengthens the argument for altering the treatment of elasticity in the principles course. Point elasticity of demand is examined as an alternative to the midpoint measure in the principles course.