Question

Explain the Ratio or percentage method of measuring price elasticity of demand.

Answer 1

Ratio method is developed by Prof. Marshall. According to this method, elasticity of demand is measured by dividing the percentage change in demand by the percentage change in price. Percentage method is also known as Arithmetic method. Price elasticity is measured as :

Elasticity of Demand (Ed) = `"Percentage change in Quantity demanded"/"Percentage change in Price"`

Ed = `(%Delta"Q")/(%Delta"P")`

Mathematically, the above formula can be presented as under.

Ed = `((Delta"Q")/"Q")/((Delta"P")/"P")` 

∴ Ed = `(Delta"Q")/"Q"xx"P"/(Delta"P")`

Q = Original quantity demanded

ΔQ = Difference between the new quantity and original quantity demanded.

P = Original price

ΔP = Difference between new price and original price

For example:

Calculate the Price Elasticity of Demand if the demand for Good X increases from 5 units to 7 units due to fall in price from Rs. 10 to Rs. 6.

Elasticity of Demand (Ed) = `"Percentage change in Quantity demanded"/"Percentage change in Price"`

Percentage change in Quantity demanded = `("change in Quantity"(Delta"Q"))/("Initial quantity"("Q"))xx100`

= `(7-5)/5xx100`

= 40%

Percentage change in price = `("Change in Price"(Delta"P"))/("Original Price" ("P"))xx100`

= `(6-10)/10xx100`

= -40%

= `-40%/40%`

= -1 or 1