Unit elastic demand occurs when a segment

The 2 main ways to measure price elasticity of demand

Some of the main ways to measure the price elasticity of demand are:

1. percentage method

2. Geometric method

Image courtesy: images.flatworldknowledge.com/rittenberg/rittenberg-fig05_003.jpg

1st percentage method:

It is the most common method of measuring the price elasticity of demand (E. d ). This method was introduced by Prof. Marshall. This method is also known as the "flow method" or the "proportioning method" or the "mathematical method".

According to this method, elasticity is measured as the ratio of the percentage change in the requested quantity to the percentage change in the price.

Demand elasticity (E. d ) = percentage change in the requested quantity / percentage change in the price

Where from:

1. Percentage change in the requested quantity = change in quantity (∆Q) / initial quantity (Q) x 100

2. Change in quantity (∆Q) = Q 1 - Q

3. Percentage change in price = change in price (∆P) / original price (P) x 100

4. Change in price (∆P) = P l - P

Proportional method:

The percentage method can also be converted into the proportional method. If you put the values ​​1, 2, 3 and 4 in the method of the percentage method, you get:

Where from

Q = requested initial quantity

Q 1 = New requested quantity

∆Q = change in the requested quantity

P = starting price

P. 1 = New price

∆P = price change

Let's understand some key concepts for measuring the price elasticity of demand using the following figures:

Illustration 1:

Calculate the price elasticity of demand when demand increases by 4 units to 5 units due to the price decrease from Rs. 10 to Rs. 8

Solution:

The elasticity of demand in the given case will be:

Demand elasticity (E. d ) = percentage change in the requested quantity / percentage change in the price

Percentage change in the requested quantity = change in quantity (∆Q) / initial quantity (Q) × 100

= (5-4) / 4 × 100 = 25%

Percentage change in price = change in price (∆P) / initial quantity (P) × 100

= (8-10) / 10 × 100 = -20%

E. d = 20% / - 25% = -1, 25 (or 1, 25, since only numerical or absolute value is taken)

Negative characters can be ignored:

The price elasticity coefficient of demand is always a negative number due to the inverse relationship between price and required quantity (whereby exceptions to the law are not taken into account). So the negative sign is always implied. However, the minus sign is often ignored when writing the elasticity value. It is more common to say the elasticity is 1.25 than to say that it is (-) 1.25. So negative signs can be ignored and positive numbers can be taken lightly.

Figure 2:

As the price increases from Rs 8 to Rs 10, the demand drops from 5 units to 4 units. Now the elasticity of demand will be:

Demand elasticity (E. d ) = percentage change in the requested quantity / percentage change in the price

Percentage change in the requested quantity = change in quantity (∆Q) / initial quantity (Q) × 100

= (4-5) / 5 × 100 = -20%

Percentage price change = price change (priceP) / starting price (P) × 100 = 25%

E. d = -20% / 25% = -0, 8

Important notes on Figures 1 and 2

1. Always take into account the absolute values:

The elasticity should always be measured and compared absolutely (ignore negative sign), not algebraically. Therefore, it is assumed that the elasticity of - 1.25 in the first figure is higher than - 0.8 in the second Illustration is.

2. Elasticity is influenced by percentage change:

The price elasticity of demand is not influenced by the absolute change in demand or price. Rather, its value is influenced by the percentage change in price or demand.

For example, is in both the first and the second Figure the changed quantity (1 unit) and the price change (Rs. 2) the same. The price elasticity in the 1st figure (- 1, 25) differs from that in the 2nd figure (- 0, 8). This happens because in the first figure the demand changes by 25% and the price change by 20%, while in the second Figure the demand changes by 20% and the price change changes by 25%.

Elasticity is a unit of measure for freedom of unity:

I. The price elasticity coefficient of demand is a pure number and is independent of price and quantity units.

ii. That is, the elasticity is not affected whether the requested amount is measured in kilograms or tons, and whether the price is measured in rupees or dollars.

iii. It does this because the elasticity takes into account the percentage change in price and quantity.

This allows us to easily compare the price sensitivity of inexpensive goods such as needles and expensive goods such as gold.

2. Geometric method:

The geometric method was proposed by Prof. Marshall and is used to measure elasticity at one point on the demand curve. The 'geometric method' is used for infinitely small changes in price and demand. This method is also known as the "graphics method" or "point method" or "arc method". The elasticity of demand (E. d ) differs at different points on the same straight demand curve.

Around Ed To measure at a given point, the lower portion of the curve from that point is divided by the upper portion of the curve from the same point.

Demand elasticity (E. d ) = Lower segment of the demand curve (LS) / Upper segment of the demand curve (US)

As can be seen in Fig. 4.1, the elasticity at a certain point 'N' is calculated as NQ / NP.

Similarly, the elasticity of demand at different points on a straight load curve is shown in Fig. 4.2:

1. Uniform elastic demand:

At the midpoint of the demand curve, ie at point B, the lower and upper segments (BD and BE) are exactly the same.

Thus the elasticity at point B = LS / US = BD / BE = 1

2. Highly elastic demand:

At any point above f, the midpoint B, but below E, that is, between E and B, the elasticity is greater than one. This happens because the lower segment is larger than the upper segment.

So, E d at point A = LS / US = AD / AE> 1 (as AD> AE)

3. Less elastic demand:

At any point below center B but above D, that is, between B and D, the elasticity is less than one. This happens because the lower segment is less than the upper segment. So E is d at point C = LS / US = CD / CE <1 (as CD

4. Perfectly elastic demand:

At every point on the Y-axis (like point E) the elasticity is infinite because there is no upper segment of the demand curve at this point. So Ed at point E = LS / US = ED / 0 = ∞ (since any number divided by zero results in infinity).

5. Perfectly inelastic demand:

At every point on the X-axis (like point D) the elasticity is zero because there is no lower segment of the demand curve at this point. So Ed at point D = LS / US = 0 / ED = 0 (dividing zero by any number results in zero).

For information on deriving the formula for the geometric method, see the Power Booster section.