Chapter – 2 Demand

Methods of Measuring PED

1. The Outlay Method
2. The Percentage Method
3. The Arc Method
4. The Point Method

4. Measurement of Geometric/Point Elasticity Method:

Geometric method was suggested by Prof. Marshall and is used to measure the
elasticity at a point on the demand curve. When there are infinitely small changes in
price and demand, then the ‘Geometric Method’ is used. This method is also known
as ‘Graphic Method’ or ‘Point Method. Elasticity of demand (Ed) is different at
different points on the same straight line demand curve.
In order to measure Ed at any particular point, lower portion of the curve from that
point is divided by the upper portion of the curve from the same point.

Elasticity of Demand (Ed) = Lower segment of demand curve (LS) / Upper segment
of demand curve (US).
Price Rs. Quantity
Demanded
2 600
4 400
6 200

6
Price
4

X Q.D
200 400 600

The elasticity at each point on the demand curve can be traced with the help of point
method as:
PED = Lower Segment
         Upper Segment
Elasticity of demand at its midpoint D is equal to unity. At any point to the right of D, the
elasticity is less than unity (PED < 1) and to the left of D, the elasticity is greater than unity
(PED > 1). Y
 

6
Price
4

X Q.D
200 400 600

PED(A) = Lower Segment

         Upper Segment

PED = 600 =3 or PED > 1 = Elastic Demand

200

PED(B) = Lower Segment

         Upper Segment

PED = 600+200/2
400

PED = 800/2
400

PED = 400 = 1 PED = 1 = Unitary Elastic Demand

400

PED(C) = Lower Segment

         Upper Segment

PED = 200 = 0.333 or PED < 1 = Inelastic Demand

600
(1) Elasticity of demand at point D = DG = 400 = 1 (Unity).
                                                     DA     400
 
(2) Elasticity of demand at point E = GE = 200 = 0.33 (<1).
                                                     EA    600
 
(3) Elasticity of Demand at point C = GC = 600 = 3 (>1).
                                                      CA    200
 
(4) Elasticity of Demand at point C is infinity.
 
(5) At point G, the elasticity of demand is zero.