Q.What do you understand by Elasticity of Demand? Write the various methods of measurement of Elasticity of Demand.
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Start your 14-day free trial to unlock the full solution →Elasticity of demand measures responsiveness of quantity demanded; price elasticity is measured by the percentage method, the total-outlay method and the geometric (point) method.
Meaning of Elasticity of Demand:
Elasticity of demand is the degree of responsiveness of the quantity demanded of a commodity to a change in one of its determinants. The three main types are price elasticity (response to a change in the good's own price), income elasticity (response to a change in income) and cross elasticity (response to a change in the price of a related good). Price elasticity is the most important; the methods below measure it.
Methods of measuring price elasticity of demand:
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Percentage (Proportionate) Method:
Under this method, Ed = percentage change in quantity demanded ÷ percentage change in price, i.e. Ed = (ΔQ/Q) ÷ (ΔP/P) = (ΔQ/ΔP) × (P/Q). Ignoring the negative sign, if Ed > 1 demand is elastic, Ed < 1 inelastic, Ed = 1 unitary. This is the most common method.
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Total Outlay (Total Expenditure) Method:
Given by Marshall, this method judges elasticity by seeing how the consumer's total expenditure (= price × quantity) changes when price changes:
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If total expenditure moves in the opposite direction to price (i.e. expenditure rises when price falls and falls when price rises), demand is elastic (Ed > 1).
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If total expenditure remains unchanged when price changes, demand is unitary elastic (Ed = 1).
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If total expenditure moves in the same direction as price (rises when price rises, falls when price falls), demand is inelastic (Ed < 1).
This method tells us only the category of elasticity, not its exact numerical value.
- Geometric (Point / Arc) Method: …
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