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Outlay Method

This method measures price elasticity of demand based on changes in a consumer's total expenditure from changes in price. It can be elastic (EP > 1), inelastic (EP < 1), or unitary (EP = 1). Elastic demand occurs when total expenditure increases as price decreases or decreases as price increases, showing an inverse relationship. Inelastic demand is when total expenditure increases as price increases or decreases as price decreases, showing a positive relationship. Unitary elasticity means total expenditure remains the same despite changes in price. The method is demonstrated using a table and graph comparing price, quantity purchased, and total expenditure to determine the elasticity in each case.

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2K views6 pages

Outlay Method

This method measures price elasticity of demand based on changes in a consumer's total expenditure from changes in price. It can be elastic (EP > 1), inelastic (EP < 1), or unitary (EP = 1). Elastic demand occurs when total expenditure increases as price decreases or decreases as price increases, showing an inverse relationship. Inelastic demand is when total expenditure increases as price increases or decreases as price decreases, showing a positive relationship. Unitary elasticity means total expenditure remains the same despite changes in price. The method is demonstrated using a table and graph comparing price, quantity purchased, and total expenditure to determine the elasticity in each case.

Uploaded by

infinity warz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Measurement of Price Elasticity of Demand by

Total Outlay Method or Expenditure Method


This method was developed by Alfred Marshall. According to this method, price
elasticity of demand is measured by the change in total expenditure or outlay of
a consumer due to the change in price of the commodity. It can be calculated as:
Total outlay = Price per unit × Quantity Purchased of a commodity
There are three cases of elasticity of demand under this method which are
explained as below:
1. Elasticity Greater than Unity ( EP > 1 )
It is also called elastic demand. If the total expenditure of the consumer
increases with the fall in price and total expenditure decreases with the rise in
price is known as elasticity greater than unity. There is Inverse relationship
between price and total expenditure of the consumer. For example, low level
income group people.
2. Elasticity Less than Unity ( EP < 1 )
It is also called inelastic demand. If the total expenditure of
the consumer increases with the rise in price and total
expenditure decreases with the fall in price is known as
elasticity less than unity. There is positive relationship
between price and total expenditure of the consumer. For
example, high level income group people.
3. Elasticity Equal than Unity ( EP = 1 )
It is also called unitary elastic demand. If the total
expenditure of the consumer remains constant with the fall
or rise in price is known as elasticity equal to unity. For
example, fixed level income group people.
It can be explained with the help of following table and figure:

Price (P) Quantity (Q) TE = P x Q Elasticity


6 1 6 EP > 1
5 2 10
4 3 12 EP = 1
3 4 12
2 5 10 EP < 1
1 6 6
In table, when the price of the commodity decreases
from 6 to 5, the total expenditure increases from 6 to 10
which shows elasticity greater than unity i.e. EP > 1.
Similarly, when price of the commodity decreases from 2
to 1 , the total expenditure decreases from 10 to 6
which shows elasticity less than unity i.e. EP < 1 .
In another situation, when the price of the commodity
fall or rise from 4 to 3 , the total expenditure remains
constant i.e. 12 which shows elasticity equal to unity.
i.e. EP = 1.
In figure, Y
A
P3 EP > 1

P2 B
Price

EP = 1

P1 C
P EP < 1
D
M1 X
O M
Total Expenditure
In figure, X- axis shows total expenditure and Y – axis
shows price of the commodity. ABCD represents total
outlay curve. The AB segment is downward sloping and
straight line which represents elasticity greater than
unity. It shows inverse relationship between price and
total expenditure. Similarly, BC segment is vertical
straight line and parallel to Y- axis which shows elasticity
equal to unity. It shows no change in total expenditure
with change in price of the commodity. Lastly, CD
segment is upward sloping and straight line which shows
elasticity less than unity. It shows positive relationship
between price and total expenditure of the consumer.

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