What Is Arc Elasticity?

Arc elasticity is the elasticity of one variable with respect to another between two given points. It is used when there is no general way to define the relationship between the two variables. Arc elasticity is also defined as the elasticity between two points on a curve.

The concept is used in both economics and mathematics. In economics, is it commonly used to measure the changes between the quantity of goods demanded and their prices.

Understanding Arc Elasticity

In economics, arc elasticity is commonly used in relation to the law of demand to measure percentage changes between the quantity of goods demanded and prices.

There are two possible ways of calculating elasticity—price (or point) elasticity of demand and arc elasticity of demand. Price elasticity of demand measures the responsiveness of quantity demanded to a price. It takes the elasticity of demand at a particular point on the demand curve, or between two points on the curve. Arc elasticity of demand uses a midpoint between the two points.

Formula for Price (Point) Elasticity of Demand


$PE_d = \dfrac{\text{\% Change in Qty}}{\text{\% Change in Price}}$PEd​=% Change in Price% Change in Qty​

How to Calculate the Price Elasticity of Demand

If the price of a product decreases from $10 to $8, leading to an increase in quantity demanded from 40 to 60 units, then the price elasticity of demand can be calculated as:

• % change in quantity demanded = (Qd₂ – Qd₁) / Qd₁ = (60 – 40) / 40 = 0.5
• % change in price = (P₂ – P₁) / P₁ = (8 – 10) / 10 = -0.2
• Thus, PE_d= 0.5 / -0.2 = 2.5

Since we’re concerned with the absolute values in price elasticity, the negative sign is ignored. You can conclude that the price elasticity of this good, when the price decreases from $10 to $8, is 2.5.

Arc Elasticity of Demand

One of the problems with the price elasticity of demand formula is that it gives different values depending on whether price rises or falls. If you were to use different start and end points in our example above—that is, if you assume the price increased from $8 to $10—and the quantity demanded decreased from 60 to 40, the Pe_d will be:

• % change in quantity demanded = (40 – 60) / 60 = -0.33
• % change in price = (10 – 8) / 8 = 0.25
• PE_d = -0.33 / 0.25 = 1.32, which is much different from 2.5

How to Calculate the Arc Elasticity of Demand

To eliminate this problem, the arc elasticity of demand can be used. Arc elasticity of demand measures elasticity at the midpoint between two selected points on the demand curve by using a midpoint between the two points. The arc elasticity of demand can be calculated as:

• Arc E_d = [(Qd₂ – Qd₁) / midpoint Qd] ÷ [(P₂ – P₁) / midpoint P]

Let’s calculate the arc elasticity following the example presented above:

• Midpoint Qd = (Qd₁ + Qd₂) / 2 = (40 + 60) / 2 = 50
• Midpoint Price = (P₁ + P₂) / 2 = (10 + 8) / 2 = 9
• % change in qty demanded = (60 – 40) / 50 = 0.4
• % change in price = (8 – 10) / 9 = -0.22
• Arc E_d = 0.4 / -0.22 = 1.82

When you use arc elasticity of demand you do not need to worry about which point is the starting point and which point is the ending point since the arc elasticity gives the same value for elasticity whether prices rise or fall.

The Bottom Line

Arc elasticity is commonly used in economics to determine the percentage of change between the demand for goods and their price. Elasticity can be calculated in two ways—price elasticity of demand and arc elasticity of demand. The latter is more useful when there is a significant change in price.

What Is an Accredited Asset Management Specialist (AAMS)?

The Accredited Asset Management Specialist (AAMS) is a professional designation awarded by the College for Financial Planning to financial professionals who complete a self-study program, pass an exam, and agree to comply with a code of ethics.

Successful applicants earn the right to use the AAMS designation with their names for two years, which can improve job opportunities, professional reputation, and pay.

Understanding the AAMS Designation

The AAMS program began in 1994 and is taught exclusively online using the CFP’s platform. The College for Financial Planning (owned by Kaplan) is a financial education provider for working adults in the financial services industry.

The AAMS program consists of 10 modules, starting with a review of the asset management process, and then covers a broad range of topics, such as investments, insurance, taxation, retirement, and estate planning issues.

To keep the privileges associated with the designation, AAMS professionals must complete 16 hours of continuing education every two years and pay a fee. The AAMS continuing education program is developed alongside some of the nation’s top investment firms. Applicants explore case studies based on real-life scenarios designed to prepare them for effectiveness in the real world and help them build lasting relationships with clients.

What Does an AAMS Do?

The AAMS certification is designed to equip new advisors with the information they need to help clients plan for and accomplish their personal financial goals. The specialists help people plan college savings, taxes, and retirement savings.

An AAMS focuses on personal finances, over and above checking and savings account management—asset management, investments, and much more.

How to Attain AAMS Certification

The AAMS certification is granted by the College of Financial Planning, the college that created the Certified Financial Planner certification.

To achieve certification, you’ll need to enroll at the College of Financial Planning. This process is not similar to traditionally enrolling in a college. You select the program from the college’s website, choose your options, and pay for the materials. You’re given an opportunity to choose printed study materials when you’re checking out.

Once you receive your materials, you have 120 days from the day you’re granted access to the online material to complete testing and pass the final exam. You follow the course online—using prerecorded videos, self-study, and printed study materials if you buy them.

The final exam for the AAMS program contains 80 questions. A passing score on the AAMS final examination is 70% or better. The time limit for the final exam is three hours, and you’re allowed two attempts to pass.

The self-study program covers several topics:

• The asset management process
• Investment strategies
• Policy and change
• Risk, return, and investment performance
• Asset allocation and selection
• Taxation of investment products
• Investment opportunities for individual retirement
• Investment considerations for small business owners
• Executive compensation and benefit plans
• Insurance products for investment clients
• Estate planning
• Regulatory and ethical issues.

Once you receive your AAMS certification, you must complete 16 hours of continuing education credits per year and pay a renewal fee of $95 once every two years to maintain your certification.

AAMS vs. CFP

AAMS certification focuses on personal finance, asset management, and investments. It is intended for newer financial planners or planners transitioning from other financial work.

Certified Financial Planners (CFP) are finance professionals certified by the College of Financial Planning to help people plan and achieve their financial goals. A CFP can assist someone throughout their lifetime, helping them adjust their finances to meet changing life events and updated financial goals.

The CFP certification is the highest accreditation available for financial planners, requiring 6,000 hours of professional planning experience within the ten years preceding the certification exam.

Special Considerations

The Financial Industry Regulatory Authority (FINRA) specifies that it does not approve or endorse any professional credential or designation. Still, it does list the AAMS as one of the available designations in the financial services industry. According to the College for Financial Planning (CFP), some organizations recognize the AAMS designation as representing 28 hours of continuing education credit.

The CFP maintains an accessible database of the names of all certificate holders and their status. When AAMS students pass their final exam, they receive credit for completing module FP511 from the CFP course.

The Bottom Line

An AAMS is a financial advisor certified by the College of Financial Planning to advise clients about personal finances, asset management, and investments. It is a challenging course of study for those unfamiliar with investing and assets, but it is also a stepping stone for achieving the highly coveted Certified Financial Planner designation.

What Is Applied Economics?

Applied economics applies the conclusions drawn from economic theories and empirical studies to real-world situations with the desired aim of informing economic decisions and predicting possible outcomes. The purpose of applied economics is to improve the quality of practice in business, public policy, and daily life by thinking rigorously about costs and benefits, incentives, and human behavior. Applied economics can involve the use of case studies and econometrics, which is the application of real-world data to statistical models and comparing the results against the theories being tested.

Understanding Applied Economics

Applied economics is the application of economic theory to determine the likely outcomes associated with various possible courses of action in the real world. By better understanding the likely consequences of choices made by individuals, businesses, and policy makers, we can help them make better choices. If economics is the science of studying how people use various, limited means available to them to achieve given ends, then applied economics is the tool to help choose the best means to reach those ends. As a result, applied economics can lead to “to do” lists for steps that can be taken to increase the probability of positive outcomes in real-world events.

The use of applied economics may first involve exploring economic theories to develop questions about a circumstance or situation and then draw upon data resources and other frames of reference to form a plausible answer to that question. The idea is to establish a hypothetical outcome based on the specific ongoing circumstances, drawn from the known implications of general economic laws and models.

Applied Economics Relevance in the Real World

Applied economics can illustrate the potential outcomes of financial choices made by individuals. For example, if a consumer desires to own a luxury good but has limited financial resources, an assessment of the cost and long-term impact such a purchase would have on assets can compare them to the expected benefit of the good. This can help determine if such an expense is worthwhile. Beyond finances, understanding the meaning of the economic theories of rational choice, game theory, or the findings of behavioral economics and evolutionary economics can help a person make better decisions and plan for success in their personal life and even relationships. For example, a person who wants to quit smoking might recognize that they are prone to hyperbolic discounting and might choose to employ precommitment strategies to support their long-term preference to quit over more powerful short-term preferences to smoke. Or a group of friends sharing a large bowl of popcorn might explicitly or implicitly agree to limits or shares on how much popcorn each will take in order to avoid a tragedy of the commons situation.

Applied economics can also help businesses make better decisions. Understanding the implications of economic laws of supply and demand combined with past sales data and marketing research regarding their target market can help a business with pricing and production decisions. Awareness of economic leading indicators and their relationship to a firm’s industry and markets can help with operational planning and business strategy. Understanding economic ideas such as principal-agent problems, transaction costs, and the theory of the firm can help businesses design better compensation schemes, contracts, and corporate strategies. 

Applied economics is an invaluable tool for public policy makers. Many economists are employed to predict both the macro- and microeconomic consequences of various policy proposals or to evaluate the effects of ongoing policy. Applied macroeconomic modeling is routinely used to project changes in unemployment, economic growth, and inflation at the national, regional, and state level. Understanding the way the economic incentives and compensating behaviors created by public policy impact real-world trends in things like job growth, migration, and crime rates is critical to implementing effective policy and avoiding unintended consequences. For example, understanding what the application of the laws of supply and demand imply about the effects of price floors, along with case studies and empirical research, can inform better policy regarding minimum wage laws.

What Are Assurance Services?

Assurance services are a type of independent professional service usually provided by certified or chartered accountants such as certified public accountants (CPAs). Assurance services can include a review of any financial document or transaction, such as a loan, contract, or financial website. This review certifies the correctness and validity of the item being reviewed by the CPA.

Understanding Assurance Services

Assurance services are aimed at improving the quality of information for the individuals making decisions. Providing independent assurance is a way to bring comfort that the information on which one makes decisions is reliable, and therefore reduces risks, in this case, information risk.

Providers of assurance services will help clients navigate the complexities, risks, and opportunities in their partner networks by proactively managing and monitoring risks presented by third-party relationships. Businesses use assurance services to increase the transparency, relevance, and value of the information they disclose to the market and their investors. Many find by sharing business performance better, it becomes a sustainable growth and competitive differentiation strategy.

Technical guidance for certified accountants who wish to engage in assurance services can be found in the International Standard on Assurance Engagements (ISAE) 3000 and in The Assurance Sourcebook published by the Institute of Chartered Accountants in England and Wales (ICAEW) that also includes practical advice for firms choosing among different assurance services.

Certain regulations over the past years have increased the demand for assurance services, such as the Sarbanes-Oxley Act of 2002, with the goal of protecting investors from false financial information.

Types of Assurance Services

Assurance services can come in a variety of forms and are meant to provide the firm contracting the CPA with pertinent information to ease decision making. For example, the client could request that the CPA carefully go over all of the numbers and math that are on the client’s mortgage website to ensure that all of the calculations and equations are correct. Below is a list of the most common assurance services.

Risk Assessment

Entities are subjected to greater risks and more precipitous changes in fortune than ever before. Managers and investors are concerned about whether entities have identified the full scope of these risks and taken precautions to mitigate them. This service assures that an entity’s profile of business risks is comprehensive and evaluates whether the entity has appropriate systems in place to effectively manage those risks.

Business Performance Measurement

Investors and managers demand a more comprehensive information base than just financial statements; they need a “balanced scorecard.” This service evaluates whether an entity’s performance measurement system contains relevant and reliable measures for assessing the degree to which the entity’s goals and objectives are achieved or how its performance compares to its competitors.

Information Systems Reliability

Managers and other employees are more dependent on good information than ever and are increasingly demanding it online. It must be right in real-time. The focus must be on systems that are reliable by design, not correcting the data after the fact. This service assesses whether an entity’s internal information systems (financial and non-financial) provide reliable information for operating and financial decisions.

Electronic Commerce

The growth of electronic commerce has been hindered by a lack of confidence in the systems. This service assesses whether systems and tools used in electronic commerce provide appropriate data integrity, security, privacy, and reliability.

Healthcare Performance Measurement

The motivations in the $1 trillion healthcare industry have flipped 180 degrees in the last few years. The old system (fee for service) rewarded those who delivered the most services. The new system (managed care) rewards those who deliver the fewest services.

As a result, healthcare recipients and their employers are increasingly concerned about the quality and availability of healthcare services. This service provides assurance about the effectiveness of healthcare services provided by HMOs, hospitals, doctors, and other providers.