Measures of Price Elasticity of Demand

There are four methods of measuring elasticity of demand. These are:-

  • Total outlay or expenditure method;
  • Point methods often referred to as the geometrical method;
  • Arc method, and
  • Mathematical method
  1. Total Outlay Method: One method of measuring price elasticity of demand, according to Marshall is to consider the change in the price and the consequent change in the demand for the product in relation to the total amount of money spent by the consumers on the product (or the total revenue received by the sellers). If the fall in price and the increase in demand for the product were proportionate, there would be no change in the total expenditure of the consumers. As for example-
Price per Unit No. of Units Demanded Total Expenditure

(Total Revenue)

15 2,000 units 30,000
10 3,000 units 30,000

In this example, the proportional change in demand and proportionate change in price are equal and, therefore, there is no change in total expenditure. In this case, elasticity of demand is said to be unity or one.

Suppose, the proportionate change in demand and is more than that of the price, total expenditure of the consumers will increase. For instance-

Price per Unit No. of Units Demanded Total Expenditure

(Total Revenue)

15 2,000 units 30,000
10 4,000 units 40,000

In this example, total expenditure by the consumers has increased because the change in demand is more than the change in price. Here the elasticity of demand is more than one or unity.

Finally, total expenditure of consumer may be less, when the price falls. This may happen when the increase in demand is proportionately less than the fall in price. For example-

Price per Unit No. of Units Demanded Total Expenditure

(Total Revenue)

15 2,000 units 30,000
10 2,500 units 25,000

When total expenditure is less for a given fall in price, elasticity is said to be less than unity or less than one

2. Point method/geometric method

Point method is used when the demand curve is a straight line. In this method we measure elasticity at a particular point on the demand curve. This method has now become the most common method of measuring elasticity of demand. We draw a demand curve DD and draw line AB tangent to the demand curve as in the Figure. The slope of DD in AB is the same between point P and P1′ we find elasticity between two points P and P1 which we should assume to be close to each other (so close that they can be taken as one point).

The elasticity of demand can be defined as:

EP =   

Now the percentage change in the quantity demanded can be presented as:

EP = × 100

Similarly, the percentage change in price can be presented as:

EP = × 100

The formula can be elaborated as:

After simplification we have

EP = *×

After re-arranging the above equation, we get

EP = ×      

Or, ________________________________, in which

Change in quantity demanded

Change in price

P = price

Q = Quantity

3. Arc method

The point method of measuring price elasticity of demand is not very realistic since demand schedules with minute changes in prices and quantities demanded are rarely available. In reality we nay come across demand schedules that have gaps in prices as well as in quantities. The most satisfactory solution is the use of the mid points between the old and the new figures in the case of both price and quantity demanded. This method of measurement is known as arc elasticity as different from point elasticity. Arc signifies a segment or portion of a curve between two points. The formula for measuring the arc elasticity is:

Ep =

; In Which

Q= Original quantity demanded

Q1= New quantity demanded

P= Original price

P1= New price

Let us take a concrete example to explain the arc method. The demand for a commodity was 2,000 units per week when the price was Rs. 5/- per unit the demand contracted to 2500 units when price was raised from Rs. 5/- to Rs. 10/- per unit.

The formula to calculate elasticity of demand by arc method is:

E =

Substituting the figures in the above equation

E =

-3/5

.6

Elasticity is – =. 6

Negative sign in elasticity coefficient represents the reciprocal relation between price and quantity.

4. Mathematical Method

The point elasticity can also be calculated mathematically. We know that the slope of demand curve at any point is

Expressed by the differential, . But in case in case we take the reciprocal of the

Slope to get, and multiply it by the ratio of original price to original quantity

p/q, we get  , which is nothing else but the elasticity of demand

Illustration: If the demand function of a consumer is Q = 500 – 20

Found when p = 10

From Q = 500 – 20 p we find that at p =10. Q=500 –20 × 10 = 300

Further,   = – 10

The elasticity of demand = = –20 ×10/300 =-2/3

= – .67

3 thoughts on “Measures of Price Elasticity of Demand”

  1. I would like to show appreciation to the writer for rescuing me from this particular incident. As a result of surfing throughout the the web and coming across strategies that were not beneficial, I thought my entire life was well over. Living without the presence of solutions to the difficulties you have resolved all through this blog post is a crucial case, as well as those which may have in a negative way damaged my entire career if I hadn’t encountered your blog. Your own personal understanding and kindness in dealing with every part was crucial. I am not sure what I would’ve done if I had not discovered such a thing like this. I am able to at this moment relish my future. Thanks very much for this high quality and amazing help. I won’t think twice to propose the blog to anybody who wants and needs recommendations on this matter.

  2. A lot of thanks for your own effort on this site. My mum really loves setting aside time for internet research and it is simple to grasp why. My partner and i know all about the compelling means you deliver good information via this blog and in addition strongly encourage contribution from website visitors on the area of interest while our own child is always learning so much. Take pleasure in the remaining portion of the new year. Your carrying out a useful job.

  3. My wife and i got so satisfied Albert could finish off his web research because of the precious recommendations he had from your very own site. It is now and again perplexing just to continually be giving freely solutions that some people could have been making money from. So we already know we now have the blog owner to thank because of that. All the explanations you have made, the easy web site navigation, the relationships you can make it easier to create – it is many wonderful, and it’s really letting our son and our family feel that this issue is amusing, which is certainly pretty mandatory. Many thanks for everything!

Leave a Reply

Your email address will not be published. Required fields are marked *