Total Outlay Method – Measures of price elasticity of Demand

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.

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