Methods of Measurement of Elasticity of Demand
Elasticity of demand can be measured through three popular methods. These methods are:
1. Percentage method or Arithmetic method
2. Total Outlay method
3. Graphic method or point method.
4. ARC Method
5. Revenue Method
1. Percentage method:
According to this method elasticity is estimated by dividing the percentage change in amount demanded by the percentage change in price of the commodity.
Ep = [Percentage change in demand / Percentage change in price]
In this method, three values of ‘Ep’ can be obtained. Viz., Ep = 1, Ep > 1, Ep < 1.
If 5% change in price leads to exactly 5% change in demand, i.e. percentage change in demand is equal to percentage change in price , Ep = 1, it is a case of unit elasticity.
If percentage change in demand is greater than percentage change in price, Ep > 1, it means the demand is Relatively elastic.
If percentage change in demand is less than that in price, Ep < 1, meaning thereby the demand is Relatively Inelastic.
2. Total Outlay Method:
The elasticity of demand can be measured by considering the changes in price and the consequent changes in demand causing changes in the total amount spent on the goods. The change in price changes the demand for a commodity which in turn changes the total expenditure of the consumer or total revenue of the seller.
If a given change in price fails to bring about any change in the total outlay, it is the case of unit elasticity. It means if the total revenue (price x Quantity bought) remains the same in spite of a change in price, ‘Ep’ is said to be equal to 1
If price and total revenue are inversely related, i.e., if total revenue falls with rise in price or rises with fall in price, demand is said to be elastic or e > 1.
When price and total revenue are directly related, i.e. if total revenue rises with a rise in price and falls with a fall in price, the demand is said to be inelastic or e < 1.
3. Graphic method or Point method:
Graphic method is otherwise known as point method or Geometric method. According to this method elasticity of demand is measured on different points on a straight line demand curve. The price elasticity of demand at a point on a straight line is equal to the lower segment of the demand curve divided by upper segment of the demand curve.
4. ARC method:
The concept of ARC elasticity was provided by Dalton and then it was further developed by Lerner. This method for the measurement of price elasticity of demand is applied when the change in price is somewhat large or the price elasticity over an ARC of demand is provided. ARC elasticity of demand is the elasticity between distinct points on the demand curve. It is an increase of average responsiveness to price change shown by a demand curve. Any two points on demand curve make an ARC.
5. Revenue Method:
Mrs. Joan Robinson has given this method. She says that elasticity of demand can be measured with the help of average revenue and marginal revenue.