Question

Write short note on:

Ratio method

Answer 1

According to this method, 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 the dem and for a good"/"Percentage change in the price of the good"`

`or, e_d = ("change in Demand"/"Initial Demand"xx100)/("Intial Demand"/"Initial Price"xx100)`

`or, e_d= - ((Q_2 - Q_1)/Q_1xx100)/(("P"_2 -"P"_1)/"P"_1xx100)`

`or e_d = ((DeltaQ)/Q_1xx100)/((Delta"P")/"P"xx100`

`therefore e_d = (DeltaQ)/"Q"_1 xx "P"/(Delta"P")`

where:

Q₂ represents final quantity demanded

Q₁ represents initial quantity demanded

ΔQ represents change in quantity demanded

P₂ represents final price

P₁ represents initial price

ΔP represents change in price