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Question
Explain the total outlay method of measuring elasticity of demand?
Solution
The total outlay method is also known as the "Total expenditure method". This method was developed by Prof. Marshall. In this method, the total amount of expenditure before and after the price change is compared. Here the total expenditure refers to the product of price and quantity demanded.
Total expenditure = Price × Quantity demanded
In this connection, Marshall has given the following propositions:
- Relatively elastic demand (Ed > 1): When with a given change in the price of a commodity total outlay increases, the elasticity of demand is greater than one.
- Unitary elastic demand (Ed = 1): When the price falls or rises, the total outlay does not change or remains constant, the elasticity of demand is equal to one.
- Relatively inelastic demand (Ed < 1): When with a given change in the price of a commodity total outlay decreases, the elasticity of demand is less than one.
This can be explained with the help of the following example.
Total outlay method
| Price in ₹ (P) | Quantity demanded in units (Q) | Total outlay (P × Q) | Elasticity of demand | |
| A | 10 | 6 | 60 | Ed > 1 |
| 20 | 5 | 100 | ||
| B | 30 | 4 | 120 | Ed = 1 |
| 40 | 3 | 120 | ||
| C | 50 | 2 | 100 | Ed < 1 |
| 60 | 1 | 60 |
In the above table example ‘A’ original price is ₹ 10 per unit and the quantity demanded is 6 units. Therefore, the total expenditure incurred is ₹ 60. When the price rises to ₹ 20 quantity demanded falls to 5 units, and the total expenditure incurred is ₹ 100. In this case, the total outlay is greater than the original expenditure. Hence, in this example elasticity of demand is greater than one. (Ed > 1) that is a relatively elastic demand.
An example ‘B’, the original price is ₹ 30 per unit and the quantity demanded is 4 units. Therefore total expenditure is ₹ 120. When the price rises to ₹ 40 quantity demanded falls to ‘3’ units. The total expenditure incurred is ₹ 120. In this case, the total outlay is the same (equal) as the original expenditure. Hence, in this example, the elasticity of demand is equal to one (Ed = 1) which is unitary elastic demand.
An example ‘C’, the original price is 50 per unit and the quantity demanded is 2 units. Therefore the total expenditure is ₹ 100. When the price rises to ₹ 60, quantity demand falls to 1 unit and the total expenditure incurred is ₹ 60. In this case, the total outlay is less than the original expenditure. Hence, the elasticity of demand is less than one (Ed < 1) which is relatively inelastic demand.
RELATED QUESTIONS
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Method of measuring price elasticity of demand -
Assertion (A): Total expenditure method measures elasticity of demand at a given point on the demand curve.
Reasoning (R): Total expenditure refers to the product of price and quantity demanded.
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Complete the correlation:
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Complete the correlation:
Ratio method : Ed = `(%triangle"Q")/(%triangle"P")` :: _______ : Ed = `"Lower segment"/"Upper segment"`
Complete the correlation:
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The coefficient of price elasticity of a good is 0.8, its demand will said to be ______.
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If the price of a commodity decreases from ₹ 70 per unit to ₹ 60 per unit and the quantity demanded remains the same, then the price elasticity of demand for that commodity will be ______.
If the percentage increase in the quantity of a commodity is smaller than the percentage fall in its price, the coefficient of price elasticity of demand is ______.
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Reason (R): In this example, Ed is exactly 1 (or unity). Ed = `2/2=1`
Select the commodities from the following which have inelastic demand:
When the price of a commodity falls by 80%, the quantity demanded increases by 100%. Find out its price elasticity of demand.
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The price of a commodity falls from ₹15 to ₹10. As a result, demand rises from 100 units to 150 units, Use the expenditure method to find the price elasticity of demand.
Study the table given below and state whether demand is elastic or inelastic. Give reasons for your answer.
| Price in (₹) | Total outlay (₹) |
| 5 | 25 |
| 3 | 18 |
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With the help of a diagram, explain the condition when EP < 1.
Give two examples of inelastic demand.
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Give two examples of unitary elastic demand.
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