Q.Explain the Ratio method of measuring price elasticity of demand.

The ratio (percentage) method finds price elasticity of demand by dividing the percentage change in quantity demanded by the percentage change in price; the size of the resulting ratio tells us whether demand is elastic, inelastic or unitary.

Price elasticity of demand measures how responsive quantity demanded is to a change in price. The ratio method expresses this responsiveness as a ratio of two percentage changes.

The formula is:

Ed = Percentage change in quantity demanded / Percentage change in price

Where the percentage change in quantity demanded = (change in quantity / original quantity) × 100, and the percentage change in price = (change in price / original price) × 100.

Interpretation of the result:

• If Ed is greater than 1 → demand is elastic (quantity responds more than proportionately to price).
• If Ed is less than 1 → demand is inelastic (quantity responds less than proportionately).
• If Ed equals 1 → demand is unitary elastic (quantity changes exactly in the same proportion as price). …