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• • • Outlay method Point method Arc method

Outlay Method Prof. Marshall developed outlay method to measure the degree of elasticity of demand. According to this method, we examine whether the total outlay of the consumer or revenue of the seller has changed after the price change. Total outlay of total revenue = Price X Quantity purchased or sold. If the total outlay remains unchanged, after the change in price, the demand is said to be unit elastic (ep = 1). When with a rise in price, if total outlay falls or with a fall in price if total outlay rises, elasticity of demand is greater than unity (ep > 1). The price and total outlay moves in the opposite direction. When with a rise in price, if total outlay rises and with a fall in price if total outlay falls, elasticity of demand is said to be less than unity (ep < 1). In this case we notice that price and total outlay move in the same direction. Table 1.Total outlay Method Price Increase Decrease Increase Decrease Increase Decrease ep = Total outlay Constant Constant Decreases Increases Increases Decreases Type of demand (e = 1) Unitary elastic (e >1) Relatively elastic (e<1) Relatively inelastic

Percentage Change in Quantity Demanded Percentage Change in Price

) 100 75 65 100 50 25 100 45 15 1000 1500 2600 1000 1000 1000 1000 900 600 e >1 e =1 e <1 Total Outlay 10 20 75 40 65 10 100 20 50 40 25 10 100 20 45 40 15 Quantity Purchased: 100 .ep = = ΔQ/ Q ΔP/ P (ΔQ/ Q) X (P/ΔP) Where Q is the original quantity ΔQ is the quantity after the price change P is the original price ΔP is the new price ΔQ ΔP = (Q2 – Q1) = (P2 – P1) Illustration Find the price elasticity of demand from the following data. Price of sugar : Solution Price of Sugar (in Rs.) 10 I 20 40 10 II 20 40 10 III 20 40 Quantity Demanded (in Kg.

5 ΔQ/ Q ΔP/ P (ΔQ/ Q) X (P/ΔP) (10/75) X (20/20) 0.When price change from 10 to Rs.13 Q2 P2 = = = 50 =20 50-100 20 – 10 = 50 = 10 ΔQ/ Q ΔP/ P (ΔQ/ Q) X (P/ΔP) (25/100) X (10/10) 0.20 in the IInd case When price change from 20 to Rs.25 Q2 P2 = = = 65 =40 65-75 = 10 40 – 20 = 20 Q2 P2 = = = 75 =20 75-100 = 25 20 – 10 = 10 When price change from 20 to Rs.20 in the Ist case Q1 P1 ΔQ ΔP ep ep = 100 = 10 = (Q2 – Q1) = (P2 – P1) = = = = Q1 P1 ΔQ ΔP ep ep = 75 = 20 = (Q2 – Q1) = (P2 – P1) = = = = Q1 P1 ΔQ ΔP ep ep = 100 = 10 = (Q2 – Q1) = (P2 – P1) = = = = ΔQ/ Q ΔP/ P (ΔQ/ Q) X (P/ΔP) (50/100) X (10/10) 0.40 in the Ist case When price change from 10 to Rs.40 in the IInd case .

20 in the IIIrd case Q1 P1 ΔQ ΔP ep ep = 100 = 10 = (Q2 – Q1) = (P2 – P1) = = = = Q1 P1 ΔQ ΔP ep ep = 45 = 20 = (Q2 – Q1) = (P2 – P1) = = = = ΔQ/ Q ΔP/ P (ΔQ/ Q) X (P/ΔP) (30/45) X (20/20) 0.Q1 P1 ΔQ ΔP ep ep = 50 = 20 = (Q2 – Q1) = (P2 – P1) = = = = ΔQ/ Q ΔP/ P Q2 P2 = = = 25 =40 25-50 40 – 20 = 25 = 20 (ΔQ/ Q) X (P/ΔP) (25/50) X (20/20) 0.5 Q2 P2 = = = 45 =20 45-100 20-10 = 55 = 10 When price change from 10 to Rs.40 in the IIIrd case .55 Q2 P2 = = = 15 =40 15-45 40 – 20 = 30 = 20 When price change from 20 to Rs.66 ΔQ/ Q ΔP/ P (ΔQ/ Q) X (P/ΔP) (55/100) X (10/10) 0.

At point A. L stands for lower segment. The point elasticity is measured by the ratio of the lower segment of the curve below the given point to the upper segment of the curve above the point.Point Elasticity Method Point elasticity measures price elasticity at various points on the demand curve. lower segment of the demand curve below the given point Upper segment of the demand curve above the given point At point c. When a point is plotted on the demand curve. note that the line segment CB and AC are of equal length. more than AD. ep = db / ad. Note that the length of line segment EB is ep = AB / 0. ep > 1 because db>ad. ep = 0 / AB. Point elasticity e = = L U Where e stands for elasticity. Note that the length of line segment DB is . ep = §. less than AE. The formula for measuring price elasticity f demand through arc method is ep = EB / AE. At point B. ep < 1 because eb<ae. Arc Elasticity of Demand Arc method is used to measure the elasticity of demand for big change in price. ep = 0. it divides the curve into two segments. At point D. price elasticity ep = CB/AC = 1. and U stands for upper segment. At point E.

consumers are induced to purchase them e. 10/= 100 units = Rs.5 Arc method is the most popular method of measuring elasticity of demand..Q1)/ (Q + Q1) (P .P1) / ( P +P1) ( 100 -3001)/ (100 + 300) (10. demand for luxury goods is elastic. consumers would postpone their purchase and when their price falls.quantity after change/ Original quantity + quantity after change ---------------------------------------------------------------------------------------------Original price – price after change/ Original price + price after change ep= ( Q . and therefore their demand is inelastic. demand for salt or medicine.200/400) X (15/5) = .5) / (10 +5) (.Q1)/ (Q + Q1) (P .ep= Original quantity. Original price of a commodity Quantity purchased at this price Price after change Quantity purchased at new price ep= ( Q . The Nature of Commodity: Demand for necessary goods do not change with changes in their price. electric chimneys etc.1. Factors Determining Price Elasticity of Demand The price elasticity of demand depends on several factors.P1) / ( P +P1) Illustration Measure arc elasticity of demand for the following data.200/400) (5/15) (.g.g. = Rs. On the other hand. demand for air conditioners. 5/= 300 units .. They are as follows:1. e. When their prices increase.

Ranges of Prices: At very high level of prices and low ranges of prices. When their price rises. On the other hand. a consumer thinks of replacing a car when its price falls.. demand for toilet soaps. demand is inelastic.Proportion of Income Spent: If the proportion of income spent on a particular commodity is very small.Possibility of postponement of use: If consumers can postpone the use of a commodity.. their consumption will be restricted to most important use. Commodities. because a slight reduction in the price of substitute goods leads to substitution effect and attracts consumers to goods whose price has fallen. is usually elastic.g. . Urgent wants create inelastic demand. which have limited use. 5. are of inelastic demand. its demand will be inelastic e. matches etc. 7. 3.g.. Durability of Goods: Durable goods are elastic because consumers replace them when their price falls and postpone their purchase when price increase e. 4. which have a variety of use is elastic.2. a slight increase in its price drives away consumers to purchase other substitutes e.g. 6. demand for salt. Extent of Use: Demand for commodities. which have several substitutes. its demand will be elastic. Substitutes: Demand for those goods.

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