Percentage Method of Elasticity of Demand

Definition of Law of Demand:

" Demand is the relationship between price of a good and its demand. The law explains that when the price of a good increases, the quantity of its demand will decrease and on the other hand if price decreases, its quantity demanded will increase with no change in other.

Percentage Method of Elasticity of Demand

Demand is actually a relative relationship between the price of something and its demand. When the change between the price of a commodity and the quantity of that commodity is measured mathematically in percentages, this method of measuring elasticity is called percentage of elasticity of demand.

Percentage elasticity method for measuring demand elasticity is the method that helps us to measure the elasticity of demand between two points.

If the change in demand due to change in price is greater, then the elasticity of demand will be more than the unit (E >1).

If the change in demand due to change in price is less, then the elasticity of demand will be less than the unit (E < 1).

If the change in price and the change in demand are equal, then the elasticity of demand will be equal to the unit (E = 1).

	Price	Demand
Price	100	80	Demand
New Price	70	120	New Demand
Change in price	30	-40	Change in demand

Formula to find out elasticity of demand by percentage method

    % change in Q

                                                     Ed =      ----------------------------------     

                                                                           % change in price

We will find out % change in demand first.

             change in demand        

                            % change in Demand = ----------------------------   ×   100

                                                                            demand     

  

             -40        

                            % change in Demand = -------------   ×   100    =     -50 %

                                                                        80        

Now, we will find out % change in price.

 

             change in price        

                            % change in Price =  ----------------------------   ×   100

                                                                            price     

  

        30        

                            % change in Price = -------------   ×   100    =     30 %

                                                                 100        

Put the % values we have found in the formula.

    % change in Q

                                                     Ed =      ----------------------------------    

                                                                            % change in price

    -50 %

                                                     Ed =      ----------------------   =   -1.66 %       

     30 %

Ignore (-) sign    Ed = 1.66 approximately

Ed > 1

Explanation:

If the table and the solved example are looked at carefully, it will be known that when the price goes down from Rs. 100 to Rs. 70, then the demand for the item increases from 80 units to 120 units. The change in price (100-70 = 30) is 30% and the change in demand (80- 120 = - 40) is 50% which indicates that the change in demand is greater than the change in price which shows that elasticity of demand here is more than a unit.

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