Question

Explain the Ratio method of measuring price elasticity of demand.

Explain Ratio method of measuring elasticity of demand.

Answer 1

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

Ed = `"Percentage change in Quantity demanded"/"Percentage change in Price"`

Ed = `(%ΔQ)/(%ΔP)`

Mathematically, the above formula can be presented as under:

Ed = `(DeltaQ)/Q ÷ (DeltaP)/P`

∴ Ed = `(DeltaQ)/Q xx P/(DeltaP)`

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