In this method, we compare the percentage change in price with the percentage change in demand. The elasticity is the ratio of the percentage change in the quantity demanded to percentage change in price charged. The formula is.
Suppose, the price to a particular brand of a radio set ~s from Rs. 500 to Rs. 400 each, i.e., 20 per cent fall. As a result of this fall in price, suppose further that the demand for the radio sets has gone up from Rs. 400 to 600, i.e., 50 per cent. Elasticity of demand will be 50/20 or 2.5 per cent. The concept of price elasticity can be used in comparing the sensitivity of the different types of goods.
Demand curve. and two tangents PM and P’ M are drawn respective at the poms . At the point T. elasticity will be equal to TM. This will apply only so long as the tangent and the curve coincide which means for an infinitesimally short distance. If there is any departure from the point T. a new tangent will have to be drawn and elasticity ascertained accordingly. For instance. at the point T” elasticity = M’ T’. Clearly, elasticity at T is greater than elasticity at T.
Two Important Conclusions. We may, therefore, note that (a) elasticity of demand is different at different points (or price ranges) of the same curve.
Elasticity is not be judged from the shape of the demand curve. That is. a steeper curve docs not necessarily indicate low elasticity and a flatter curve a high elasticity. This is explained below.