9.
Explanation
Price Elasticity of Demand is a concept in economics that measures the responsiveness of the quantity demanded of a good or service to changes in its price. In other words, it quantifies how much the quantity demanded of a product changes in response to a change in its price. Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price.
There are several methods to measure price elasticity of demand:
1. Percentage Change Method : This is the most commonly used method. It calculates PED by taking the percentage change in quantity demanded and dividing it by the percentage change in price. The formula is as mentioned above.
2. Total Expenditure Method : This method focuses on how changes in price affect the total expenditure on a good. If the total expenditure increases when the price falls (elastic demand), PED is greater than 1; if it decreases (inelastic demand), PED is less than 1; and if it remains constant (unitary elastic demand), PED is equal to 1.
Point Elasticity Method : This method calculates the elasticity at a specific point on the demand curve rather than over a range of prices and quantities.
Arc Elasticity Method: This method is used when it’s necessary to calculate elasticity between two specific points on the demand curve. It avoids the problem of choosing a starting and ending point for percentage changes.
3. Geometric or Midpoint Method: This method is a variation of the arc elasticity method that uses the midpoint between two price-quantity combinations. It’s considered more accurate because it avoids the problem of asymmetry in percentage changes.
4. Income Elasticity of Demand: While not directly measuring price elasticity, this measures how changes in consumer income affect the quantity demanded of a good. It can be used in conjunction with PED to understand consumer behaviour better.
Conclusion: These methods allow economists and businesses to assess the sensitivity of consumer demand to changes in prices, helping in pricing strategies, market analysis, and government policy decisions.