Total outlay method
Rating:
6,5/10
489
reviews

Total outlay on the product remains the same with a fall in the price of the product. Total outlay on the product decreases with a fall in the price of the product. For example, demand for two brands of tea. Now, we may conclude that at the midpoint of the straight line demand curve, elasticity of demand is equal to unity. Case ii Non-Liner Demand Curve: It is possible that the demand curve is not a straight line but a curve. The total outlay after the fall in the price has decreased. But, generally, the change in the price is not too small, so that we have to measure the elasticity over a substantial range of a demand curve.

On the one side of it are demands with elasticity greater than one, e. How do you resolve this problem? The reason for this is ,if total outlay has to be the same then the percentage change in price has to be equal to percentage change in quantity demanded. This means that with the fall in price the total outlay made on the goods has remained the same. The value of E p again differs in this example than that given in example iii for the reason stated above. Perfectly elastic, where supply is infinite at any one price.

At point P on demand curve, elasticity of demand is calculated with the formula, In this way, value of Ep is one which means that price elasticity of demand is unitary. It is very responsive to price reductions. By comparing the total expenditure of a purchaser both before and after the change in price, it can be known whether his demand for a good is elastic, unity or less elastic. Elasticity becomes zero when the demand curve touches the X-axis. With this formula, we can compute price elasticities of demand on the basis of a demand schedule.

This is shown in the table when with the fall in price from Rs. Total expenditure falls as price falls in the elasticity range, i. It will be seen from Table 1 that quantity demanded increases from 30 pens at price Rs. However, in case of inelastic products, an increase in price shall add up to your revenue. It is a dividing line. By looking at the Table 2.

We arrive at the conclusion that at the mid-point on the demand curve, the elasticity of demand is unity. Demand is more elastic if time involved is long. If there is a single numerical elasticity of demand over the whole length of the curve, there is no problem, but this rarely happens we shall discuss some curves having uniform elasticity in the later part of this chapter. For example, by this means we may find that the price elasticity for grosgrain. This is clear from the Fig. It means, there is opposite relationship between price and total expenditure.

Non-linear demand curve We have just seen how to measure point elasticity when you have linear demand curve. . If the price of one brand A increases then the demand for the other brand B increases. At points higher than the middle point, elasticity of demand is greater than unity. Learning Objectives After reading this chapter, you are expected to learn about: 1. This is known as outlay method. If price-total expenditure curve is vertical or parallel to 7-axis, it means that with fall in price from Rs.

Five points L, M, N, P and Q are taken on this demand curve. Diagrammatic Representation: The total expenditure can be explained with the help of Fig. The accuracy of the percentage method is questioned on the ground that the value of the elasticity depends on which value is taken as the starting point in the calculation of percentage. The proportionate increase in demand is greater than the proportionate fall in the price. This means that the demand for grosgrain less sensitive to price changes than demand for fruit. Further, the measure of the arc elasticity gives an approximation of the true elasticity of the arc. Graphically, the point elasticity of a linear demand curve is shown by the ratio of the right segment to the left segment of the particular point.

In the short run , it is difficult to substitute one commodity for another. They are valueless for their interpretations. Thus it is clear that with the fall in price, the total expenditure also falls and vice-versa. Let us calculate elasticity of demand percentage method using market demand schedule table 4 and the market demand curve figure 5. Zero 0 , which is perfectly inelastic. It shows unitary elastic demand as we can see that total expenditure has constant with fall in price. Measuring Price elasticity on a non â€”linear demand curve.