​Measurement of Price Elasticity of Demand

1)Point method           2)Arc method

3)Total outlay/expenditure method


1)Point method

             This method is adopted in order to measure the elasticity of certain/particular point at a demand curve. Under this method the elasticity of a point is calculated by dividing the lower segment by the upper segment.

i)When demand curve is linear: If the demand curve is linear, the demand curve is extended to the axes and the lower is segment is divided by the upper segment.

ii)When demand curve is non linear: If the demand curve is non linear, a tangent line is drawn to the related point where elasticity is to be measured then the lower segment is divided by upper segment.

2)Arc method:

                When there is significant change in price and quantity demanded arc method is adopted to measure price elasticity of demand. This method is also regarded as average method. Since, the average of initial & current quantity and an average of initial and current price are considered.

3)Total outlay method / Expenditure method

             Under this method the price elasticity is measured by establishing the relationship between the price & total expenditure. Accordingly, when the price changes quantity demanded also changes changing the total expenditure. Since the price elasticity is calculated by considering change in price & change in total expenditure. Similarly, when the price increase the total expenditure sometimes may increase, sometimes may remains constant and sometime may decrease by giving three types of elasticity.

i)Elasticity less than unity: In this case when the price increases, the total expenditure also increases. Thus, there is positive/direct relation between price and total expenditure.

ii)Elasticity equal to unity: In this situation the increase in price doesn’t change the total expenditure, where total expenditure remain constant. Thus the income elasticity has no impact due to increase in price.

iii)Elasticity greater than unity: In this case the increase in price tends to decrease in total expenditure. There is negative/inverse relation between price and total expenditure.

The income elasticity of demand by total expenditure method can be explained under the following figure:

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  In the figure, there are three situation of price elasticity:

AC: There is direct relationship between P & TE                                (Ep<1)

CD: There is no any effect in TE with the change           in price.     (Ep=1)

DF: There is indirect relation between P & TE.                                   (Ep>1)

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