Price of X

Demand (Units)

200

1000

100

1500

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Explain Ratio method and Geometric method of measuring price elasticity of demand.
Price elasticity of demand is measured with the
help of the following two methods.
1)
Ratio or Proportional Method
This ratio method of measuring elasticity of demand
is also known as Arithmetic or Percentage method also. This method is developed
by Dr. Marshall. In this method we consider percentage change in quantity
demanded and divide it by percentage change in the price of the commodity.
Thus
Numerical Illustration
Table No.3.4
Ratio or Proportional Method
Price of commodity X falls from Rs. 200/ to Rs.
100/ and quantity demanded increases from 1000 units to 1500 units. Here
percentage change in demand is 50, whereas percentage change in price is also
50. Therefore, 50%, / 50% = 1, which, means Ed is unitary or one, in this
example.
Point Elasticity Method
or Geometric Method
The proportional method and total outlay method
enable us to measure elasticity of demand at a given point on the demand curve.
Therefore, Dr. Marshall has developed yet another method to measure elasticity
of demand, which is known as Point or Geometric method. At any point on demand
curve elasticity of demand is measured with the use of the following formula.
With the help of the following example, we can
understand how to measure elasticity of demand at a point on, linear demand
curve.
Linear Demand Curve
Fig. No. 3.10
In the above figure DD is, demand curve and we
assume that its length is 6 cm. At Point P, demand is infinite elastic, whereas
at point P_{4} elasticity of demand is zero. Therefore, we have
to measure elasticity of demand on points, P_{1}, P_{2} and P_{3}
At
point P_{1}, elasticity of demand = lower
segment of the demand curve below the^{ }given point P_{2} P_{4} ÷ Upper segment of the demand
curve above the point^{ }is P_{1 }P. Therefore, Ed = P_{1} P_{4} ÷ P_{1}P. Ed>1. It means demand is
elastic or elasticity of demand is greater than one at point.
Similarly, by using the above given formula, we can
measure elasticity of demand at point P_{2} and P_{3}. At point P_{2} , demand is unitary elastic. It
means elasticity of demand is equal to one whereas at point P_{3} demand is less than one.