Measurement of Elasticity of Demand

Measurement of Elasticity of Demand

There are three methods for measuring elasticity of demand. •

Outlay method

•

Point method

•

Arc method

Outlay Method

Prof. Prof. Marsha Marshall ll develop developed ed outlay outlay method method to measur measuree the degree degree of elasti elasticit city y of demand. demand. According to this method, we examine whether the total outlay of the consumer or revenue of the seller has changed after the price change. Total outlay of total revenue = Price X Quantity  purchased or sold. If the total outlay remains unchanged, after the change in price, the demand is said to be unit elastic (e p = 1). When with a rise in price, if total outlay falls or with a fall in price if total outlay rises, elasticity of demand is greater than unity (e p > 1). The price and total outlay moves in the opposite direction.

When with a rise in price, if total outlay rises and with a fall in price if total outlay falls, elasticity of demand is said to be less than unity (e p < 1). In this case we notice that price and total outlay move in the same direction.

Table 1.Total outlay Method Price Increase

Total outlay Constant

Type of demand   (e = 1)

Decrease Increase

Constant Decreases

Unitary elastic (e >1)

Decrease Increase

Increases Increases

Relatively elastic (e 1 because db>ad. Note that the length of line segment DB is

more than AD. At point E,

e p = EB / AE; e p < 1 because eb