Measurement of Price Elasticity (Geometric Method) Price elasticity of demand measures how sensitive demand is to changes in price. It is calculated as t...
Price elasticity of demand measures how sensitive demand is to changes in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
Geometric method:
Draw a supply and demand curve.
Find the equilibrium price and quantity.
Calculate the change in price and quantity demanded by finding the difference between the initial and final price.
Calculate the percentage change in price and the percentage change in quantity demanded.
Apply the following formula to calculate the price elasticity of demand:
Price elasticity of demand = - percentage change in quantity demanded / percentage change in price
Geometric Interpretation:
A price elasticity of demand of 1 means that the percentage change in quantity demanded is equal to the percentage change in price.
A price elasticity of demand greater than 1 means that the percentage change in quantity demanded is greater than the percentage change in price.
A price elasticity of demand less than 1 means that the percentage change in quantity demanded is less than the percentage change in price.
Examples:
Increased price: A price elasticity of demand of 1.5 means that if the price increases by 10%, the quantity demanded will decrease by 15%.
Decreased price: A price elasticity of demand of -0.5 means that if the price decreases by 10%, the quantity demanded will increase by 5%.
Applications:
Understanding price elasticity of demand helps businesses make decisions such as pricing, marketing, and product development.
It helps predict changes in demand due to price changes.
It is used in various economic models and theories, such as perfect competition and market equilibrium