There are three methods of measuring price elasticity of demand:
According to this method, price elasticity of demand is measured using the following formula:
At Rs. 46 per unit , the demand for a commodity is 30 units. If the price increases from Rs. 46 to Rs. 50 per unit, the demand decreases from 30 units to 15 units. The price elasticity of demand is:
Total Expenditure or Total Outlay Method
Total expenditure on the commodity is measured as the product of price and quantity (Total expenditure = P × Q) when price changes, total expenditure (TE) on the commodity may increase, decrease or remain constant.
Note the following situations:
(i) If, TE remains constant even after change in , price elasticity of demand is said to be equal to unity .
(ii) If TE increases following a fall in , and TE decreases following a rise in (so that and TE move in the opposite direction), price elasticity of demand is said to be greater than unity .
(iii) If TE increases following an increase in and TE decreases following a decrease in (so that and TE move in the same direction), price elasticity of demand is said to be less than unity .
When price of a good falls from Rs. 8 per unit to Rs. 7 per unit, its demand rises from 12 units to 16 units. The elasticity of demand is measured as under.
Demand (in units)
Total Expenditure (Rs.)
Since, total expenditure increases with fall in price, elasticity of demand is greater than unity. It is a situation of elastic demand.
This method is used when elasticity of demand is measured corresponding to a specific point on a given demand curve. It is also called ‘Point Method’ of measuring elasticity of demand. This is explained with reference to Fig.2. In this figure, MN is a straight line demand curve. P is a mid-point on the demand curve which divides the demand curve in two equal segments, viz. lower segment (PN) and upper segment (PM). In order to measure elasticity of demand at any point on the demand curve, the lower segment from that point is divided by the upper segment. Thus:
(i) : The point of reference happens to be a mid-point on the demand curve, like P in Fig. 3.
(ii): If the point of reference happens to be within the upper half of the demand curve, like point A.
(iii) : If the point of reference happens to be within the lower half of the demand curve, like point B.
(iv) : At point N, where the demand curve touches the X-axis,
(v) : At point M, where the demand curve touches the Y-axis,
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