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Question
What are the methods of measuring Elasticity of demand?
Solution
There are three methods of measuring the elasticity of demand.
- The percentage method:
Ep = `"ΔQ"/"ΔP"xx P/Q`
It is also known as the ratio method when we measure the ratio as
Ep = `"%ΔQ"/"%ΔP"`
% ∆Q = perCentage change in demand, %∆P = Percentage change in price.
- Total outlay method:
Marshall suggested that the simplest way to decide whether demand is elastic or inelastic is to examine the change in the total outlay of the consumer or total revenue of the firm.
Total revenue = Price × Quantity sold
TR = P × Q
Total outlay method:
Demand is elastic if there is an inverse relationship between price and total outlay, and direct relation means inelastic. Elasticity is unity when the total outlay is constant.
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