SEMINAR

MEASUREMENT OF
ELASTICITY

DEMAND
Demand

is a common parlance means desire

for an object. But in economics demand is
something more than this. In economics
Demand means the quantity of goods and
services which a person can purchase with a
requisite amount of money.

DIFFERENT TYPES OF DEMAND

Joint demand:
When two or more commodities are jointly demanded at the same time to satisfy a
particular want, it is called joint or complimentary demand.(demand for milk, sugar,
tea for making tea).
Composite demand:
The demand for a commodity which can be put for several uses (demand for
electricity)
Direct and Derived demand:
Demand for a commodity which is for a direct consumption is called direct demand.
(food, cloth). When the commodity is demanded as s result of the demand of another
commodity, it is called derived demand.(demand for tyres depends on demand of
vehicles).
Industry demand and company demand:
Demand for the product of particular company is company demand and total
demand for the products of particular industry which includes number of companies

DEMAND ANALYSIS
Demand analysis means an attempt to determine the factors affecting the demand
of a commodity or service and to measure such factors and their influences. The
demand analysis includes the study of law of demand, demand schedule, demand
curve and demand forecasting. Main objectives of demand analysis are;
1)
2)
3)
4)
5)

To
To
To
To
To

determine the factors affecting the demand.

measure the elasticity of demand.
forecast the demand.
increase the demand.
allocate the recourses efficiently

ELASTICITY
The concept of elasticity of demand was introduced by Marshall

Elasticity of demand can be defined as the degree of responsiveness in

quantity demanded to a change in price. Thus it represents the rate of
change in quantity demanded due to a change in price. There are mainl
three types of elasticity of demand:

1. Price Elasticity of Demand.

2. Income Elasticity of Demand.
3. Cross Elasticity of Demand.

Elasticity Demand

MEASUREMENT OF ELASTICITY

here are various methods for the measurement of elasticity of demand.

ollowing are the important methods:
1. Proportional or Percentage
Method
2. Expenditure or Outlay Method
3. Geometric or Point method
4. Arc Method

1. PROPORTIONAL OR
PERCENTAGE METHOD
Under this method the elasticity of demand is measured by the
ratio between
the proportionate or percentage change in quantity demanded
and proportionate change in price. It is also known as formula
method. It can be computed as follows:

2. EXPENDITURE OR OUTLAY
METHOD
This method was developed by Marshall. Under this method,
the elasticity is measured by estimating the changes in total
expenditure as a result of changes in price and quantity
demanded. This has three components

Total Revenue (TR) = (Price (P) Quantity

Sold (Q))

Marshall has further attributed the

following propositions:
(a) ep> 1
- Elastic demand
- The percentage increase in quantity demanded is greater than the
percentage
- fall in price of a commodity- Revenue increases because the
increase in quantity
- demanded brings more revenue irrespective of the decrease in
price
- In this case, price and revenue move in opposite directions

(b) ep< 1
- Inelastic demand
- The percentage increase in quantity demanded is less than the
percentage decrease in price
- Revenue decreases because of the fall in price and very small
increase in quantity demanded
- In this case, price and revenue move in the same direction

(c) ep= 1
- Unitary elastic demand
- The percentage increase in quantity demanded equals the
percentage decline in price
-Revenue remains the same because the fall in price is
offset by the increase in quantity demanded of the commodity.

3. GEOMETRIC OR POINT
METHOD

also developed by Marshall. This is used as a measure of the change in quant

manded in response to a very small change in the price. In this method we can
sure the elasticity at any point on a straight line demand curve by using the
wing formula;

In the above diagram, AB is a straight line

demand curve with P as its middle point.
Further it is assumed that AB is 6 cm. then,
At
At
At
At
At

point
point
point
point
point

P, ED = PB/PA=3/3=1
P1, ED = P1B/P1A= 4.5/1.5= 3=>1,
A, ED = AB/A= 6/0= (infinity),
P2, ED = P2B/P2A = 1.5/4.5 = 1/3 = <1
B, ED = B/BA = 0/6 = 0

4. ARC METHOD
the point method is applicable only when there are minute (very
small) changes in price and demand. Arc elasticity measures elasticity
between two points. It is a measure of the average elasticity
According to Watson, Arc elasticity is the elasticity at the midpoint of
an arc of a demand curve. formula to measure elasticity is:

The formula under the percentage method is (Q/P) (P/Q).