Price Elasticity of Demand measures the Degree of Responsiveness in Quantity Demanded due to Change in Price, when other factors *** Constant .
It can be measured by the following methods :
A. Percentage Method : According to this method degree of elasticity of demand can be calculated by the ratio between percentage change in quantity demanded and percentage change in price of the commodity. For this, first we have to calculate the percentage change in price and percentage change in quantity demanded, which we can calculate by using the given formulae :
(i) % Change in Price = Δp/p x 100
(ii) % change in Quantity Demanded = ΔQ/q x 100
Here, p = change in price , q = change in quantity demanded,
P = Initial price , Q = initial quantity demanded.
After that we can calculate the degree of elasticity by using the following formulae :
ep =(% Change in Quantity Demand/% Change in Price)
B. Proportionate Method : According to this Method the Co-efficient of Price Elasticity of Demand can be calculated by the Ratio between Proportionate Change in Quantity Demanded and Proportionate Change in Price.
ep = (Proportionate Change in Quantity Demanded/Proportionate Change in Price)
Here, q = Change in Quantity Demanded ,
p = Change in Price ,
Q = Initial Quantity Demanded ,
P = Initial Price
Degrees of Price Elasticity of Cemand can be classified as :
(a) Perfectly Elastic Demand : When the quantity demanded changes too much (increases that much that it may becomes infinite or decreases that much that it may becomes zero) with the very minute change in its price, then it is termed as perfectly elastic demand . This condition can be found in the perfect competition market where the commodity produced by different firms is identical in every aspects, means the commodity is homogenous . But this condition can not be found in practical world . In this case the demand curve would be horizontal or parallel to X axis and that’* why slope of the demand curve would be zero. In this case the degree of elasticity of demand is infinite (ep = ) because of too much change in quantity demanded.
(b) Highly Elastic Demand (or Elastic Demand or More Elastic Demand) : When the percentage (or proportionate) change in quantity demanded is more than the percentage (or proportionate) change in price, then it is termed as highly elastic demand. In other words the percentage increase in quantity demanded is more than the percentage decrease in price or the percentage decrease in quantity demanded is more than the percentage increase in price . It is a realistic condition and can be found in the case of luxurious goods, like jwellery, mobile phones, etc. In such cases demand curve would be more steeper than perfectly elastic demand but less steeper than unitary elastic demand. The degree of elasticity of demand in this case is greater than one (ep > 1).
