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 |
% 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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