Concept of Elasticity and types of elasticity
Concept of Elasticity of Demand: The concept of elasticity of demand was first introduced by the classical economists A.A Cournot and J.S. Mill. Later on, neo-classical economists Alfred Marshall...
Total Outlay Method
The total outlay method was developed by Alfred Marshall. This method is used for the measurement of price elasticity of demand. The measurement of price elasticity according to the expenditure made on a commodity due to change in price of the commodity is known as total outlay method.
I. Elasticity of Demand Less than Unity (Ep <1):If the total amount of expenditure made on a commodity increases with increase in price and it decreases with decrease in price, it is called elasticity of demand less than unity.
|
Price of a Commodity (P) (Rs per Kg) |
Quantity Demanded (Q) (Kg per month) |
Total Expenditure (TE) (TE = P×Q)
|
|
Rs. 10 |
90 Kg |
Rs. 900 |
|
20 |
50 |
1000 |
|
30 |
40 |
1200 |
The above table shows that when the price increases from Rs.10 to Rs.20 to Rs. 30, the total expenditure also increases from Rs.900 to 1000 to 1200 per month respectively and vice-versa. It shows the elasticity of demand less than unity.
II. Elasticity of Demand Equal to Unity (Ep =1 ) :If the amount of total expenditure made on a commodity remains constant with the change in price, it is known as elasticity of demand equal to unity.
|
Price of a Commodity (P) (Rs per Kg) |
Quantity Demanded (Q) (Kg per month) |
Total Expenditure (TE) (TE = P×Q)
|
Rs. 10 |
90 Kg |
Rs. 900 |
20 |
45 |
900 |
30 |
30 |
900 |
III. Elasticity of Demand Greater than Unity (Ep > ): If the total amount of expenditure decreases with increase in price and it increases with decrease in price, it is known as elasticity of demand greater than unity.
| Price of a Commodity (P) (Rs per Kg) | Quantity Demanded (Q) (Kg per month) | Total Expenditure (TE) (TE = P×Q)
|
| Rs. 10 | 90 Kg | Rs. 900 |
| 20 | 30 | 600 |
| 30 | 10 | 300 |
The above table shows that when the price increases from Rs.10 to Rs.20 to Rs. 30, the total expenditure decreases from Rs. 900 to 600 to 300 per month respectively and vice-versa. It shows the elasticity of demand greater than unity.
In the graph, total outlay or expenditure is measured on the X-axis while price is measured on the Y-axis. In the figure, the movement from point T to point A shows elastic demand as we can see that total expenditure has increased with fall in price. The movement from point A to point B shows unitary elastic demand as total expenditure has remained unchanged with the change in price. Similarly, the movement from point B to point E shows inelastic demand as total expenditure as well as price has decreased.
Total outlay method of measuring price elasticity of demand does not provide us exact numerical measurement of elasticity of demand but only indicates if the demand is elastic, inelastic or unitary in nature. Therefore, this method has limited scope.
