Explain Ratio method of measuring elasticity of demand.

Answer: Ratio (percentage) method: \(E_d = \dfrac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}}\).

The ratio or percentage method was introduced by Prof. Alfred Marshall. Elasticity is measured as the ratio of the percentage change in quantity demanded to the percentage change in price:

\(E_d = \dfrac{\Delta Q / Q}{\Delta P / P} = \dfrac{\Delta Q}{\Delta P} \times \dfrac{P}{Q}\)

where \(Q\) = original quantity, \(\Delta Q\) = change in quantity, \(P\) = original price, \(\Delta P\) = change in price. The minus sign due to inverse relation is ignored.

Illustration: If price falls from ₹ 10 to ₹ 8 and demand rises from 100 to 150 units, \(\Delta Q = 50\), \(\Delta P = 2\); \(E_d = \dfrac{50}{2} \times \dfrac{10}{100} = 2.5\), i.e. relatively elastic demand.

Interpretation: \(E_d = 1\) unitary elastic; \(E_d \gt 1\) relatively elastic; \(E_d \lt 1\) relatively inelastic; \(E_d = 0\) perfectly inelastic; \(E_d = \infty\) perfectly elastic.