Question

Define elasticity of demand and explain its measurement by the percentage method.

Hint:

Percentage Method Formula: \[ E_d = \frac{%\Delta Q}{%\Delta P} \] It focuses on proportionate changes, not absolute changes.

Answer 1

Concept: Elasticity of demand refers to the degree of responsiveness of quantity demanded of a commodity due to a change in one of its determinants, especially price. In simple terms:
It shows how much demand changes when price changes. 
Definition: Price elasticity of demand is defined as: \[ E_d = \frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}} \] Measurement by Percentage Method: The percentage (or proportionate) method was developed by Alfred Marshall. It measures elasticity using proportionate changes instead of absolute changes. Formula: \[ E_d = \frac{\%\Delta Q_d}{\%\Delta P} \] Expanding the formula: \[ E_d = \frac{\frac{\Delta Q_d}{Q_d} \times 100}{\frac{\Delta P}{P} \times 100} = \frac{\Delta Q_d}{Q_d} \div \frac{\Delta P}{P} = \frac{\Delta Q_d}{Q_d} \times \frac{P}{\Delta P} \] Steps to Measure:

• Find change in quantity demanded ($\Delta Q_d$).
• Find change in price ($\Delta P$).
• Calculate percentage change in both.
• Take the ratio using the formula above.

Interpretation of Values:

• $E_d > 1$ : Elastic demand
• $E_d = 1$ : Unitary elastic demand
• $E_d < 1$ : Inelastic demand
• $E_d = 0$ : Perfectly inelastic
• $E_d = \infty$ : Perfectly elastic

Conclusion:
Thus, elasticity of demand measures responsiveness of demand to price changes, and the percentage method calculates it as the ratio of percentage change in quantity demanded to percentage change in price.