Measurements:

There are various methods of measurements of price elasticity of demand and among them the following two methods are the most important one.

1. Total expenditure method or Total outlay method
2. Point method

Total outlay method:

Professor Marshal has suggested one of the simplest method to measure the price elasticity is total outlay method. This method is also called as total expenditure method. Under this method the price elasticity is measured by comparing the total expenditure of the consumer before and after variation in price. We measured price elasticity by examining the change in total expenditure as a result of change in the price and quantity demanded for a commodity.

 Total expenditure= price per unit x total quantity purchased.

Note:

• when new outlay is greater than the original outlay after change in price then ED>1
• when new outlay is equal to the original after change in price then ED=1
• when new outlay is less than the original outlay after changing price then ED<1

The problem is like. With the help of total outlay method find out the price elasticity of demand and show the graphical presentation.

Solution:

From the diagram it is clear that

• From A to B price elasticity is greater than 1
• From B to C price elasticity is equal than 1
• From C to D price elasticity is lower than 1

Point method:

Professor Alfred Marshall also advocated the point method. This method is also called as geometric method for measuring PED at a point on the demand curve. It can be explained either with the help of mathematical calculation or with the help of a diagram or graphical representation.

The formula to calculate price elasticity is

PED=percentage change in demand / percentage change in price

Percentage change in demand can be presented as

Change in demand/ original demand X 100

Likewise percentage change in price can be represented as

Change in price/original price X 100

The formula can be therefore be elaborated as

PED= change in demand X 100/original demand /change in priceX100/original price

Simplifying this we can have

PED=change in demand/original demand X original price/change in price

PED=change in demand/change in price X original price/original demand

Symbolically =∆D/∆P XP/D

By making use of the above formula we can calculate the elasticity of demand at any point on a straight line demand curve.

The simplest way of explaining the point method is to consider a linear or straight line demand curve. Let the straight line demand curve be the extended to meet the two Axis X and Y when a point is plotted on the demand curve. It divides the curve into two segments the point elasticity is measured by the ratio of lower segment of the demand curve below the given point to the upper segment of the curve above the point hence

Point elasticity=lower segment of the demand curve below the point/upper segment of the demand curve above the point.

In short, e =L/u where e stands for point elasticity, L for lower segment and u stands for upper segment

In the diagram, AB is the straight line demand curve and P is the given point PB is the lower segment and PA is the upper segment.

E=L/U=PB/PA

If after the actual measurement of the two points of the demand curve we find that PB is 3 cm, PA is 2 cm, then elasticity at point p is 3/2=1.5 cm

If the demand curve is non- linear then we have to draw a tangent at a given point extending it to the intersect both Axis point elasticity is measured by the ratio of the lower part of the tangent below that given point to the upper part of the tangent above the point then elasticity at point p can be measured as PB/PA.