Measurement of Price Elasticity — The Percentage (Proportionate) Method

The most direct way to measure price elasticity is the percentage method, also called the proportionate or ratio method. It applies the definition straight away:

where $\Delta Q$ is the change in quantity, $\Delta P$ the change in price, and $P, Q$ the original price and quantity taken as the base. The last form, $\dfrac{\Delta Q}{\Delta P}\times\dfrac{P}{Q}$, is the most convenient for calculation.

Steps: (i) find $\Delta Q$ and $\Delta P$; (ii) note the original $P$ and $Q$; (iii) substitute; (iv) read the numerical value and classify (>1 elastic, <1 inelastic, =1 unitary). The sign will come out negative because $\Delta Q$ and $\Delta P$ have opposite signs — we report the absolute value.

Total-outlay (total-expenditure) test. A quick business check on elasticity looks at what happens to the buyer's total expenditure ($TE = P \times Q$, which is the seller's total revenue) when price changes: