Question

Answer the detail :

Explain Ratio method and Geometric method of measuring Elasticity of Demand.

Answer 1

Ratio method:
Ratio method is used to estimate elasticity at any point on a straight line demand curve. Elasticity is measured as the ratio of percentage change in quantity demanded to the percentage change in price i.e.

$e_d=\frac{\mathrm{Percentage}\mathrm{change}\mathrm{in}\mathrm{demand}\mathrm{for}\mathrm{a}\mathrm{good}}{\mathrm{Percentage}\mathrm{change}\mathrm{in}\mathrm{price}\mathrm{of}\mathrm{a}\mathrm{good}}$

Geometric Method:
Geometric method is also called point method of measuring elasticity. Under this method, elasticity is measured at different points on a demand curve. This method of measuring price elasticity was developed by Dr. Marshall. A demand curve can either be a straight line demand curve or a rectangular hyperbola curve. Accordingly, we study the geometric method of measuring elasticity for the two types of demand curves. The price elasticity on any point of the demand curve is calculated by using the following formula:
$\mathrm{Price}\mathrm{Elasticity}\mathrm{of}\mathrm{Demand}=\frac{\mathrm{Lower}\mathrm{segment}\mathrm{of}\mathrm{the}\mathrm{demand}\mathrm{curve}\mathrm{below}\mathrm{the}\mathrm{given}\mathrm{point}}{\mathrm{Upper}\mathrm{segment}\mathrm{of}\mathrm{demand}\mathrm{curve}\mathrm{above}\mathrm{the}\mathrm{given}\mathrm{point}}$
Accordingly at the the mid-point of straight line demand curve, the elasticity will be equal to one. For points above the mid-point the elasticity will be greater than one. On the contrary for points below the mid-point the elasticity will be less than one.