Measuring Price Elasticity: Percentage Method
Chapter 4: Elasticity of Demand — Formula, Calculator, and Worked Examples
Percentage Method — Formula
PERCENTAGE METHOD (FLUX METHOD / PROPORTIONATE METHOD)
$$E_d = \frac{\text{Percentage change in Quantity demanded}}{\text{Percentage change in Price}}$$
Also known as: Flux Method, Proportionate Method, Mathematical Method — all refer to the same formula introduced by Prof. Marshall.
Percentage change in Quantity
%ΔQ = (ΔQ / Q) × 100
Where ΔQ = Q₁ − Q
Percentage change in Price
%ΔP = (ΔP / P) × 100
Where ΔP = P₁ − P
Live Calculator
Enter values to compute price elasticity in real time.
Input Values
Results
ΔQ
1
ΔP
-2
%ΔQ
25.00%
%ΔP
-20.00%
Eₔ
1.25
Highly elastic (Eₔ > 1)
Proportionate Method Alternative
The percentage method can also be expressed in a different form known as the Proportionate Method. Both give the same result.
PROPORTIONATE METHOD
$$E_d = \frac{\Delta Q}{\Delta P} \times \frac{P}{Q}$$
Variables
- Q = Initial Quantity demanded
- ΔQ = Change in Quantity (Q₁ − Q)
- P = Initial Price
- ΔP = Change in Price (P₁ − P)
- Q₁ = New Quantity demanded
- P₁ = New Price
Alternative Expression
$$E_d = \frac{1}{\text{Slope of Demand Curve}} \times \frac{P}{Q}$$
Where: Slope of Demand Curve = ΔP / ΔQ
Key difference: Under the Percentage Method, percentage changes in price and demand are considered. Under the Proportionate Method, absolute changes in price and demand are considered. Both arrive at the same elasticity value.
Key Concepts About Price Elasticity Measurement
Always Consider the Absolute ValueElasticity should always be measured and compared in absolute terms (ignoring the negative sign), not in algebraic terms. So, elasticity of 1.25 is taken to be higher than 0.8.Example: If Eₔ of goods X and Y are 3 and 4 respectively, Good Y is more elastic — one percent price change results in 4% demand change for Y, while only 3% for X.
Affected by % Change, Not Absolute ChangePrice elasticity is not affected by absolute change in demand or price. Its value is influenced by percentage change.In two different scenarios, the same absolute change (1 unit, ₹2) can produce different elasticities because the percentage changes differ based on the starting values.
Elasticity Is a “Unit-Free” MeasureThe coefficient of price elasticity is a pure number independent of price and quantity units. It is not affected whether quantity is measured in kilograms or tonnes, or price in rupees or dollars.So we can easily compare price sensitivity of inexpensive goods (needle) with expensive goods (gold) — even though their absolute price scales are vastly different.
Worked Examples
Solved Example
Problem
Calculate price elasticity of demand if demand increases from 4 units to 5 units due to fall in price from ₹10 to ₹8.
Solution
Eₔ = (−) 1.25 (Demand is highly elastic as Eₔ > 1)
Solved Example
Problem
When price rises from ₹8 to ₹10, the demand falls from 5 units to 4 units. Calculate price elasticity of demand.
Solution
Eₔ = (−) 0.8 (Demand is less elastic as Eₔ < 1)
Negative Sign May Be IgnoredThe coefficient of price elasticity of demand is always a negative number (ignoring exceptions to law of demand) because of the inverse relationship between price and quantity demanded. The negative sign is always implied.It is more common to say “elasticity is 1.25” than “elasticity is (−)1.25”.
Samosa Stall Connection: A samosa seller currently sells 100 samosas daily at ₹15 each. If she drops the price to ₹12 (20% fall) and sells 140 samosas (40% rise), Eₔ = 40/20 = 2. The demand is highly elastic — the samosa stall owner knows that a price cut will significantly boost her sales volume. This same calculation applies to any business deciding whether to run a discount.