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.

${\displaystyle e_d=\frac{\text{Percentage change in the dem and for a good}}{\text{Percentage change in the price of the good}}}$

${\displaystyle \text{or},e_d=\frac{\frac{\text{change in Demand}}{\text{Initial Demand}}\times 100}{\frac{\text{Intial Demand}}{\text{Initial Price}}\times 100}}$

${\displaystyle \text{or},e_d=-\frac{\frac{Q_2-Q_1}{Q_1}\times 100}{\frac{{\text{P}}_2-{\text{P}}_1}{{\text{P}}_1}\times 100}}$

${\displaystyle \text{or}{e}_d=\frac{\frac{\Delta Q}{Q_1}\times 100}{\frac{\Delta \text{P}}{\text{P}}\times 100}}$

${\displaystyle \therefore e_d=\frac{\Delta Q}{{\text{Q}}_1}\times \frac{\text{P}}{\Delta \text{P}}}$

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