ICS FA ICom Notes Class XI Principles of Economics Measurment of Elasticity

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Measurment of Elasticity

The practical purposes, it is not enough to know whether the demand is elastic or inelastic. It is more useful to find out to what extent it is so. For that purpose it is essential to measure elasticity.

Three methods are generally used for measurement of elasticity, which are explained below:

1. Total Outlay Method

In this method, we compare the total outlay of the purchases (or total revenue from the point of view of the seller) before and after the variations in the price. It may be expressed as:

Unity:

It is unity, when even though the price has changed, the total amount spent or total revenue remains the same.

Greater than Unity:

When with the fall in the price the total amount spent or total revenue increases on the total amount spent (total revenue) decreases when the price rise it is said to be greater than unity .

Less than Unity:

Elasticity between two prices is considered to be less than unity when the total amount spent (total revenue) decreases with the rise n the price and decreases with a fall in the price.

Though this method is dimple it suffers from a serious drawback. It simply classifies the price elasticity in three categories and does not assist in measuring it in numerical terms.

2. Proportional Method

In this method we compare the percentage change in price with the percentage change in demand. The elasticity is the ratio of the percentage change in the quantity demanded to the percentage change in the price charged. Its formula is:

Elasticity of Demand = Propotionate Change in amount Demanded / Propotionate Change in Price

3. Geometrical Method

We can better understand with the help of the figure:

In the figure DD’ is the demanded curve which is a straight line. Here the demand is represented by the fraction distance from D’ to a point on the curve divided by the distance from the other to that point. Thus elasticity of demand on the points P1, P2 and P3 is.

If the curve is not a straight line the above formula can be used by drawing a tangent at a point where the elasticity is to be measured.