Measurement of the Elasticity of Demand
The measurement of elasticity of demand is the ratio of the percentage change in quantity demanded to the percentage change in price. There are three methods of measuring the elasticity of demand which are as follows
- Total Outlay Method
- Proportionate or Percentage Method
- Point Method or Geometrical Method
Total Outlay Method
To measure the elasticity of demand, Marshall used the Total Outlay Method. Under this method, the comparison is made of the amount of money spent by the consumer on any commodity on change in its price. There are the following three conditions of elasticity of demand on the basis of the Total Outlay Method.
The Elasticity of Demand is Equal to the Unity
When, even after a change in prices, the amount expended on the commodity remains the same or in other words on an increase in price, demand decreases in the same proportion and on a decrease in price, demand increases in the same proportion, so that total expenditure remains the same. In such a condition, the elasticity of demand is called Equal to Unity.
Price of Commodity Demand of Commodity Total Expenditure $4.00 100 400 $2.00 200 400 $8.00 50 400 The Elasticity of Demand More than Unity
If a fluctuation in price has such an effect on the commodity that an increase in its price, total expenditure falls and a decrease in price causes a rise in the total expenditure, in such a condition, elasticity of demand is said to be more than unity.
Price of Commodity Demand of Commodity Total Expenditure $4.00 100 400 $2.00 300 600 $8.00 30 240 The Elasticity of Demand Less than Unity
If a reduction in the price of a commodity causes a reduction in the total expenditure and an increase in its price causes an increase in the total expenditure, in such a situation, the elasticity of demand is said to be less than unity.
Price of Commodity Demand of Commodity Total Expenditure $4.00 100 400 $2.00 150 300 $8.00 80 640
Proportionate or Percentage Method
This method was developed by Prof. Flux. Under this method, the elasticity of demand is calculated by dividing the proportionate or percentage change in demand by the proportionate or percentage change in price.
Elasticity of Demand = ΔM / ΔK ΔM = Percentage change in the demand for the commodity ΔK = Percentage change in the price of the commodity
According to this method also, the elasticity of demand can be divided into three categories
The Elasticity of Demand is Equal to the Unity
When the price of a commodity increases by 20% and the demand for that commodity decreases by 20% too, in such a case, elasticity of demand is equal to unity.
Elasticity of Demand = 1
The Elasticity of Demand More than Unity
If the change in the demand for a commodity is 40% and the change in its price is 20%, in such a situation it is called elasticity of demand more than unity.
Elasticity of Demand = 2 > 1
The Elasticity of Demand Less than Unity
If the change in demand is 20% and the change in price is 50%, in such a case elasticity of demand is said to be less than unity.
Elasticity of Demand = 0.4 < 1
Point Method or Geometrical Method
This is a geometrical method of measurement of the elasticity of demand. Under this method, the point at which elasticity of demand is to be ascertained on the demand line, at that point, the upper part is divided by the lower part of the line.
Measurement of Elasticity Elasticity of Demand = ΔM / ΔK ΔM = Lower part of the line ΔK = Upper part of the line
If the product is 1 then elasticity is equal to unity, if the product is more than 1, elasticity is more than unity and if the product is less than 1, the elasticity of demand is less than unity.
