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Explain Any 'Two Methods' of Measuring Price Elasticity of Demand. - Economics

Explain any 'two methods' of measuring price elasticity of demand.

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Solution

The following are the two methods of measuring price elasticity of demand:

1) Ratio Method

Ratio method is used to estimate elasticity at any point on a straight line demand curve. Elasticity is measured as the ratio of percentage change in quantity demanded to the percentage change in price i.e

`e_d = "Percentage change in demand for a good"/"Percentage change in the price of a good"`

2) Geometric Method

A geometric method is also called point method of measuring elasticity. Under this method, elasticity is measured at different points on a demand curve. This method of measuring price elasticity was developed by Dr Marshall. The price elasticity on any point of the demand curve is calculated by using the following formula.

`"Price Elasticity of Demand" = "Lower segment of the demand curve below the given point"/"Upper segment of demand curve above the given point"`

Accordingly, at the mid-point of straight line demand curve, the elasticity will be equal to one. For points above the mid-point, the elasticity will be greater than one. On the contrary, for points below the mid-point, the elasticity will be less than one.

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