Question

Write short notes on:

1. Geometric method

2. Ratio method

Answer 1

1. 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.

In the figure, AB is a straight line demand curve

Now consider point D on the demand curve. Elasticity at this point (D) can be calculated as:

As the point D lies at the middle of the demand curve, so the lower segment of point D (i.e. DA) is equal to the upper segment of point D (i.e. DB). Thus, e_d at point D is equal to 1.

At point B, point elasticity of demand is equal to

As against this, at point A, the elasticity of demand is equal to

At point F, the elasticity of demand is calculated as:

2. According to this method, elasticity is measured as the ratio of percentage change in quantity demanded to the percentage change in price i.e.



where:

Q₂ represents final quantity demanded
Q₁ represents initial quantity demanded
ΔQ represents change in quantity demanded
P₂ represents final price
P₁ represents initial price
ΔP represents change in price