Q.(a) What are the methods of measuring Elasticity of Demand ?

(a) Elasticity of demand is measured by the percentage, total-outlay, point and arc methods. (b) The Loanable Funds theory (a neo-classical, part-monetary theory) fixes the interest rate at the point where the demand for loanable funds equals their supply.

(a) Methods of measuring Elasticity of Demand (in the Tamil Nadu HSC Class-11 Economics syllabus):

1. Percentage / proportionate method: price-elasticity Ep = (percentage change in quantity demanded) ÷ (percentage change in price). If Ep > 1 demand is elastic, Ep < 1 inelastic, Ep = 1 unitary.
2. Total outlay (total expenditure) method: developed by Marshall — compare total spending (price × quantity) before and after a price change. If total outlay rises when price falls, demand is elastic; if it stays the same, unitary; if it falls, inelastic.
3. Point method (geometric method): elasticity is measured at a particular point on a straight-line demand curve as the ratio of the lower segment to the upper segment of the curve from that point. It varies from infinity at the top to zero at the bottom.
4. Arc method: when the change in price is large, elasticity is measured over an arc (between two points) using the average of the two prices and the average of the two quantities, to avoid different answers depending on direction.

(b) Loanable Funds theory of Interest:

• Core idea: propounded by neo-classical economists (Wicksell, Robertson, Ohlin), the theory says the rate of interest is determined by the demand for and the supply of loanable funds in the market (not by savings and investment alone). It is a synthesis of real and monetary factors.
• Supply of loanable funds comes from: (i) Savings of households and firms, (ii) Dishoarding of past idle balances, (iii) Bank credit (new money created by banks), and (iv) Disinvestment (funds released when worn-out capital is not replaced). …