Measuring Price Elasticity of Demand- Proportionate or Percentage Method

 

 Learning Contents:                                                            

·         Introduction to Proportionate method of Price Elasticity of Demand

·         Questions For Practice

 

Proportionate or Percentage Method

It is one of the commonly used method for measuring the price elasticity of demand. In this method, the elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. The formula for calculating the elasticity of demand is given below:
















Interpreting Elasticity of Demand using Percentage Elasticity of Demand 

Case

Description

Degree of elasticity

Numerically, Ed

1.

If the calculated value is more than 1

 

More than Unitary Elastic or Elastic Demand

 

Ed>1

2.

If the calculated value is equal to 1

Unitary Elastic Demand

 

Ed=1

3.

If the calculated value is less  than 1

Less than Unitary Elastic Demand or Inelastic Demand

 

Ed<1


Questions for Practice:

1. When the price of a commodity was ₹10 per unit, its demand in the market was 50 units per day. When the price of the commodity fell to ₹ 8, the demand rose to 60 units. Here, the price elasticity of demand can be calculated as

Solution:

Following information is given:

 

Q = 50 units

 

Q1= 60 units

 ΔQ =Q1-Q

      =60-50

      =10

 

P = ₹ 10

 

P1= ₹8

ΔP = P1-P

     =8-10

     = -2

       

                                     Ed=?












Note:  (-) negative sign is prefixed to the formula because price and demand are inversely related. Doing this would bring the value of elasticity of demand to positive. 

Interpretation:

The calculated value of Elasticity of demand(Ed) is 1 indicates unitary elastic demand. It implies that a 1% fall in the price of the commodity caused a 1% increase in its demand showing that change in demand is equal to change in price.

2. The quantity of a good demanded rises from 1 unit to 4 units when the price falls from ₹4 to ₹ 2 per unit. The price elasticity of demand for the good is approximately:

Solution:

Following information is given:

 

Q = 1 unit

 

Q1= 4 units

 ΔQ =Q1-Q

      =4-1

      =3

 

P = ₹ 4

 

P1= ₹2

ΔP = P1-P

     =2-4

     = -2

       

                                     Ed=?











Note:  (-) negative sign is prefixed to the formula because price and demand are inversely related. Doing this would bring the value of elasticity of demand to positive. 

Interpretation:

The above calculated value of Elasticity of demand(Ed) is 6 >1 indicates more than unitary elastic demand. It implies that a 1% fall in the price of good causes 6% increase in its demand showing that change in demand is greater than the change in price.

3. At ₹26 per unit, the demand for a commodity is 30 units. If the price increases from ₹26 to ₹30 per unit, the demand decreases to 15 units. Calculate the price elasticity of demand.

Solution:

Following information is given:

 

Q = 30 units

 

Q1= 15 units

 ΔQ =Q1-Q

      =15-30

      = -15

 

P = ₹ 26

 

P1= ₹30

ΔP = P1-P

     =30-26

     = 4

       

                                     Ed=?

 











Note:  (-) negative sign is prefixed to the formula because price and demand are inversely related. Doing this would bring the value of elasticity of demand to positive. 


Interpretation:

The above calculated value of Elasticity of demand(Ed) is 3.25 >1 indicates more than unitary elastic demand. It implies that a 1% rise in the price of the commodity causes 3.25% fall in its demand showing that change in demand is greater than change in price. 

4. When the price of a good falls from ₹10 to ₹8 per unit, its demand rises from 20 units to 24 units. What will be its price elasticity of demand?

Solution:

Following information is given:

 

Q = 20 units

 

Q1= 24 units

 ΔQ =Q1-Q

      =24-20

      = 4

 

P = ₹ 10

 

P1= ₹8

ΔP = P1-P

     =8-10

     = -2

       

                                     Ed=?




Note:  (-) negative sign is prefixed to the formula because price and demand are inversely related. Doing this would bring the value of elasticity of demand to positive. 


Interpretation:

The above calculated value of Elasticity of demand(Ed) is 1 indicates unitary elastic demand. It implies that a 1% fall in the price of good causes a 1% rise in its demand showing that change in demand is equal to change in price.

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