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Questions
Explain any 'two methods' of measuring price elasticity of demand.
State the three methods of measuring price elasticity of demand.
State the point method of measuring the price elasticity of demand.
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Solution 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"` - 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.
Solution 2
- Percentage or Proportionate Method: The ratio of the percentage change in the quantity demanded to the percentage change in the commodity's price is used in this method to calculate price elasticity of demand. Thus:
`e_p = "Percentage change in quantity demanded"/"Percentage change in price"` - Total Expenditure Method: Marshall suggests the 'Total Expenditure Method' as one way to measure price elasticity of demand. The amount that households spend when they buy a commodity is known as the total expenditure or total outlay. TE = P × Q, where TE is the total expenditure and P and Q are the price and quantity, respectively, is the product of a commodity's price and the quantity required at that price.
- Point Method (Geometric Method): Geometrically, price elasticity of demand can be measured with the help of what is known as 'Point Method'. According to this method, price elasticity of demand at any point on the demand curve can be measured by:
ep = `"Line segment below the point on the demand curve"/"Line segment above the point on the demand curve"`
Notes
Students should refer to the answer according to their questions.
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