Introductory Economics

Measurement of Price elasticity of demand

There are five methods of measuring price elasticity of demand. These are

1. Total expenditure method
2. Percentage method
3. Point method
4. Arc elasticity method
5. Revenue method

Total expenditure method:

• This method was developed by Dr. Marshall. According to this method in order to measure the elasticity of demand it is essential to know how much and in what direction the total expenditure has changed as a result of change in the price of a commodity.
  

Price Elasticity	How total expenditure changes as result of price change
	Price rise	Price decrease
Less than unitary or inelastic	Total expenditure increases	Total expenditure decreases
Unitary elastic	No change in total expenditure
Elastic or greater than unitary	Total expenditure decreases	Total expenditure increases

This method can also be explained with the following diagram.

In this figure total expenditure is shown on X-axis and price on Y-axis. EP is the total expenditure curve. The BC segment of this curve shows the unitary elasticity as when price rises from P2 to P3 total expenditure remains the same. Similarly, EB segment shows the greater than unitary elasticity since as the price increases from P3 to P4 total expenditure decreases from P3B to P4A. PC segment of the expenditure curve shows less than unitary elasticity as when price increases from P1 to P2 total expenditure increases from P1D to P2C.

Prof. Leibhafasky has made use of the following formula to measure price elasticity of demand form total expenditure method.

E_d = 1 - Δ Exp./ D₀ ΔP
where
Δ Exp = change in expenditure
D₀= initial demand
ΔP = change in price

Suppose P=Rs 10 D₀ = 50 Exp. = 10x50= 500
P1= Rs 20 D1 = 40 Exp. =20x40 =800

Then Ed = 1- 300/ 50x 10= 1- 3/5
= 2/5= 0.40 i.e. less than unitary.