Explain any 'two methods' of measuring price elasticity of demand.
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.
Video Tutorials For All Subjects
- Elasticity of Demand