Question

How is price elasticity of demand measured?

State any two methods of measuring price elasticity of demand.

Explain the percentage method of measuring price elasticity of demand, using examples.

Describe any two methods of measurement of elasticity of demand.

Answer 1

There are three methods of measurement of price elasticity of demand. These are:

1. 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 to calculate price elasticity of demand.

e_p = `"Percentage change in quantity demanded"/"Percentage change in price"`

Example: Let us calculate elasticity of demand by using the percentage method by taking a numerical example.

Suppose the price of the commodity falls from ₹ 50 to ₹ 40 and the quantity demanded increases from 100 units to 150 units.

In this example,

Q = 100 ΔQ = 150 − 100 = 50

P = 50 ΔP = 50 − 40 = 10

∴ e_p = `(Delta Q)/(DeltaP)xxP/Q`

= `50/10xx50/100`

= 2.5

2. Total Expenditure Method: The expenditure technique states that the change in the total amount spent on a commodity as a result of a change in the commodity's price can be used to calculate the 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. For instance, the total cost will be ₹ 60 (6 × 10) if 10 units of a commodity are requested at a price of ₹ 6.

3. Point Method (Geometric Method): The “Point Method” is a geometric tool that may be used to measure price elasticity of demand. This approach allows for the measurement of price elasticity of demand at any point on the demand curve by:

e_p = `"Line segment below the point on the demand curve"/"Line segment above the point on the demand curve"`