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Some of the methods used for measuring price elasticity of demand are as follows:
1. Total Expenditure Method.
2. Proportionate Method.
3. Point Elasticity of Demand.
4. Are Elasticity of Demand.
5. Revenue Method.
. Total Expenditure Method:
Dr. Marshall has evolved the total expenditure method to measure the price elasticity of demand. According to this method, elasticity of demand can be measured by considering the change in price and the subsequent change in the total quantity of goods purchased and the total amount of money spent on it.
Total Outlay = Price X Quantity Demanded
There are three possibilities:
(i) If with a fall in price (demand increases) the total expenditure increases or with a rise in price (demand falls), the total expenditure falls, in that case the elasticity of demand is greater than one
(ii) If with a rise or fall in the price (demand falls or rises respectively), the total expenditure remains the same, the demand will be unitary elastic or ED = 1.
(iii) If with a fall in price (Demand rises), the total expenditure also falls, and with a rise in price (Demand falls) the total expenditure also rises, the demand is said to be less classic or elasticity of demand is less than one
In the Table we find three possibilities:
A. More Elastic Demand:
When price is Rs. 10 the quantity demanded is 1 unit and total expenditure is 10. Now price falls from Rs. 10 to Rs. 6, the quantity demanded increases from 1 to 5 units and correspondingly the total expenditure increases from Rs. 10 to Rs. 30. Thus it is clear that with the fall in price, the total expenditure increases and vice-versa. So elasticity of demand is greater than one
B. Unitary Elastic Demand:
If price is Rs. 6, demand is 5 units so the total outlay is Rs. 30. Now price falls to Rs. 5, the demand increases to 6 units but the total expenditure remains the same i.e., Rs. 30. Thus it is clear that with the rise or fall in price, the total expenditure remains the same. The elasticity of demand in this case is equal to one or
ED = 1.
C. Less Elastic Demand:
If price is Rs. 5, demand is 6 and total outlay is Rs. 30. Now price falls from Rs. 5 to Re. 1. The demand increases from 6 units to 10 units and hence the total expenditure falls from Rs. 30 to Rs. 10. Thus it is clear that with the fall in price, the total expenditure also falls and vice-versa. In this case, the elasticity of demand is less than one
(i) Downward Sloping Curve:
If the price- total expenditure curve slopes downward from left to right, it means the elasticity of demand is greater than one. As we see in the diagram that when price falls from Rs. 10 to Rs. 5 the total expenditure increases from Rs. 10 to Rs. 30. It means, there is opposite relationship between price and total expenditure. The elasticity of demand in this case is greater than one. Thus the curve from A to D represents the elasticity greater than one
(ii) Vertical Curve.
If price-total expenditure curve is vertical or parallel to 7-axis, it means that with fall in price from Rs. 6 to Rs. 5 the total expenditure remains the same. Thus if total expenditure does not change with the rise or fall in price, the elasticity of demand will be equal to one. Thus by joining points D and G we get vertical curve showing elasticity of demand equal to one or Ed =1.
(iii) Upward Sloping Curve:
If price-total expenditure curve rises upward from left to right, it means the elasticity of demand is less than one. In the diagram, we find that when price falls from Rs. 5 to Re. 1the total expenditure also falls from Rs. 30 to Rs. 10. It means by joining G, H, I, J we get an upward sloping curve showing elasticity of demand less than one. Thus it is clear that the changes in total expenditure due to changes in price also affect the elasticity of demand.
2. Proportionate Method:
This method is also associated with the name of Dr. Marshall. According to this method, “price elasticity of demand is the ratio of percentage change in the amount demanded to the percentage change in price of the commodity.”
13 окт 2024
