Defination

Elasticity of demand is defined as proportionate change in quantity demanded in response to proportionate change in price.
Price elasticity of demand
Measurement of price elasticity

Elasticity of demand can be measured by three methods viz.

Proportional method

Total outlay method and

Geometrical method
Proportional method

In proportional method, price elasticity of demand is measured as below.

Price elasticity of demand is the ratio of proportionate change in the quantity demanded to the proportionate change in the price.

Suppose price of an egg falls from Rs. 1.25 to Re.1 and as a result, the demand rises from 10 to 15 eggs, then price elasticity of demand (Ep)
Total outlay method

In total outlay method, from the changes in the total expenditure made on a good as a result of changes in its price, the price elasticity of demand for the good is measured.

But with this method, we can know only whether the elasticity is equal to one, greater than one or lesser than one and we cannot precisely work out the coefficient of elasticity.

If the total expenditure made on the good remains the same, when the price of a commodity consumed changes, the elasticity of demand is equal to one.

Because, the total expenditure made on the good can remain the same, only when the proportional change in the quantity demanded is equal to the proportional change in price.

When the total expenditure made on the good increases as a result of a fall in price or when the total expenditure decreases as a result of a rise in price, then the price elasticity of demand will be greater than one.

When the total expenditure decreases as a result of a fall in price or when the total expenditure increases as a result of a rise in price, then the price elasticity of demand will be less than one.

Consider the following table, which gives quantity demanded of milk at various prices.
Total outlay and elasticity of demand

Quantity demanded increases from 50 litres to 60 litres and total outlay increases from Rs. 725 to Rs. 855, when the price decreases from Rs. 4.50 to Rs. 4.25 i.e. the quantity demanded increases so much that the total outlay on milk increases indicating thereby that elasticity of demand is greater than one at these prices.
Price of milk (Rs.) per litre

Quantity demanded in litres

Total outlay (Rs.)


14.50

50

725.00



14.25

60

855.00

e>1

14.00

75

1050.00

e>1

13.75

80

1100.00

e=1

13.50

84

1134.00

e<1

13.25

87

1152.75

e<1

Geometrical method

Geometrical method tells how to measure elasticity of demand at any point on a curve.

Following is the straight demand curve DD'. Elasticity at a particular point is represented by a fraction distance from D' to that point divided by the distance from the other end.

Thus elasticities of demand on the points P, Q, and R are D' P/DP, D' Q/DQ and D' R/DR respectively. Since Q is in the middle of the curve, elasticity D' Q/DQ is equal to one.

Any point above this point will have an elasticity of more than one and points below Q will have elasticity of less than unity. Therefore, it can be concluded that elasticity of demand is different at different points of the same curve.


Point elasticity can be used only when the demand curve is known. However, often only scanty data on price and quantity are available in which cases it will be difficult to find point elasticity.

Instead, we shall have arc elasticity (an arc is a portion or a segment of a curve).

Instead of using old and new price and quantity, here we take the average of both. Thus the arc elasticity is the average elasticity which is equal to
Income elasticity of demand
Cross elasticity of demand

It is a measure of responsiveness of demand for goods to given change in the price of related goods.
