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Question
Explain the Ratio method of measuring price elasticity of demand.
Solution
The ratio method is developed by Prof. Marshall. According to this method, the elasticity of demand is measured by dividing the percentage change in demand by the percentage change in price. The percentage method is also known as the Arithmetic method. Price elasticity is measured as:
Ed = `"Percentage change in Quantity demanded"/"Percentage change in Price"`
Ed = `(%Δ"Q")/(%Δ"P")`
Mathematically, the above formula can be presented as under:
Ed = `(Delta"Q")/"Q" ÷ (Delta"P")/"P"`
∴ Ed = `(Delta"Q")/"Q" xx "P"/(Delta"P")`
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