explain the point method of measuring price elasticity of demand: Measurement of Price Elasticity Meaning, Methods, and FAQs

Revenue can be defined as the sale proceeds of a firm by selling a certain amount of units at a given price. Suppose the distance of lower segment PB is 6 cm and upper segment PA is 4 cm. In order to measure Ed at any particular point, lower portion of the curve from that point is divided by the upper portion of the curve from the same point.

Therefore the three explain the point method of measuring price elasticity of demand of Elasticity of Demand are Price Elasticity of Demand, Cross Elasticity of Demand, and Income Elasticity of Demand. So, in both the cases, the numerical value of price elasticity of demand is same. Therefore, the arc elasticity method of calculating price elasticity of demand is more reliable and accurate. In practical applications, it is not sufficient to determine whether the demand is elastic or inelastic.

Any two points on a demand curve make an arc, and the coefficient of price elasticity of demand of an arc is known as arc elasticity of demand. This method is used to find out price elasticity of demand over a certain range of price and quantity. Thus, this method is applied while calculating PED when price or quantity demanded of the commodity is highly changed.

Measurement of Price Elasticity of Demand

Number of substitutes available for a product or service to a consumer is an important factor in determining the price elasticity of demand. The larger the numbers of substitutes available, the greater is the price elasticity of demand at any given price. Suppose the price of a product is Rs. 50, then the demand for the product is 500 units. If the price of the product increases to Rs. 75, then the demand decreases to 300 units.

• The coefficient of price elasticity of demand is a pure number and is independent of price and quantity units.
• Consequently, the absolute value of e becomes smaller and demand becomes less elastic.
• Consumers usually buy more when the price of the commodity falls and tends to buy less when the price of the commodity rises.
• In another world, inelastic demand is the case in which there is a positive or direct relationship between the price of the good and the total expenditure of a buyer on that good.
• This article was about the elasticity of demand, which is an important concept for the students of commerce.
• When price falls or rises, total outlay does not change or remains constant, elasticity of demand is equal to one.

In case ‘C’, original price is ₹2 per unit and quantity demanded is 50 units. When price falls to ₹1 per unit, quantity demand rises to 60 unit and total expenditure incurred is ₹60. In this case total outlay is less than original expenditure. In the above figure five points L, M, N, P, and Q are taken on the given linear demand curve. The elasticity of demand at each point can be identified with the help of the above method. Suppose the N point is in the exact center of the given demand curve.

Any point left to the mid-point of the demand curve the point elasticity of demand is greater than unitary means demand is more elastic. The value of PED would be less than 1 if total spending decreases with a decline in price and rises with a rise in price. Here, commodity prices and overall spending are going in the same direction. In comparison to supply price elasticity, demand price elasticity is often a negative number since the quantity requested and the product share price are inversely related.

Measuring Price Elasticity of Demand (4 Methods )

In the fig., there are three phases of the https://1investing.in/ expenditure curve. When they are set above the market price, then there is a possibility that there will be an excess supply or a surplus. If this happens, producers who can’t foresee trouble ahead will produce larger quantities. When two goods are complementary like tea and sugar to each other, the cross elasticity between them is negative.

The area of rectangle OB is less than the area of rectangle OA. Similarly, we can say that the decrease in price represented by the area between Rs. 60 to 50 is higher than the increase in demand represented by the area of 10 to 11 units. In this method, the percentage change in quantity demanded is compared with percentage change in price.

Price Elasticity on a Non-linear Demand Curve

The price elasticity of demand is the percentage change in the quantity demanded of a good or a service, given a percentage change in its price. In figure-9, AD represents the demand curve that is a straight line. The elasticity of demand at point B would be represented as BD/BA.

So, when total expenditure moves in the opposite direction to the change in price, the elasticity of demand is greater than unitary. Following schedule and graph help to understand the nature of elastic demand. Just using a different starting point for the price movement has caused a roughly 100% increase in elasticity which doesn’t sound right. If the difference between P0 and P1 or Q0 and Q1 is high, our estimate for price elasticity will not be accurate. Thus, the arc elasticity measures the average elasticity, that is, at the midpoint of the chord AB. If the price of the goods increases or decreases in the same ratio and consequently demand also contracts and extends in the same manner then elasticity of demand will remain the same.

Types of Price Elasticity of Demand

On the other hand, if the numerical value of price elasticity of demand is greater than one, then it is said to be more than unit elasticity of demand. The different methods of price elasticity of demand (as shown in Figure-7). This video simplifies the process of calculating the price elasticity of demand using the midpoint formula. In this method, it is assumed that the demand curve is a straight line .

Hicks, the English economist, in 1939, devised the concept of elasticity of price expectations. The elasticity of price expectations may be defined as the ratio of the relative change in expected future prices to the relative change in current prices. It can be seen from the figure 1.4 that if the demand curve is falling the TR curve initially increases, reaches a maximum, and then starts declining.

Point Elasticity of Demand

We can also represent this method diagrammatically (Fig. 10.5). Take total expenditure along the X-axis and price along the Y-axis. The portion O1 represents less than unity elasticity, because an increase or decrease in price increases or decreases the total expenditure.

The coefficient of price elasticity of demand is a pure number and is independent of price and quantity units. For example, in both 1st and 2nd illustration, change in quantity demanded and change in price (Rs. 2) is same. However, price elasticity in the 1st illustration (- 1.25) is different from that in the 2nd illustration (- 0.8).

The coefficient of elasticity of demand is a pure number i.e. it stands by itself, being independent of units of measurement. The coefficient of price elasticity of demand can be calculated with the help of the following formula. Like demand, supply also has an elasticity, known as price elasticity of supply. Price elasticity of supply refers to the relationship between change in supply and change in price.

When the total expenditure does not vary with a change in the price of the commodity, the elasticity of demand is equal to unit or unitary. In such a case, a change in the quantity demanded just offsets the change in price. Therefore, the rise or fall in the price of a good does not change the total expenditure of households in the case of unitary elasticity of demand under the total outlay method. The following schedule and graph will show the concept of such a type of elasticity of demand. Thus, when total expenditure moves with a change in price in a positive direction then it is inelastic demand.

However, an important point here is that we always consider the percentage change in the values rather than considering the absolute value while calculating the elasticity of a commodity. Thus, we compare the percentage change in quantity demanded of a particular product to the percentage change in any other factor which affects demand (Price, Income, etc.). The Price Elasticity of Demand for any goods measures the willingness of the consumers to buy less of the goods when the price rises and more of the goods when the price falls.

Method # 2. Income Elasticity of Demand:

The diagram shows the total expenditure on the X-axis and the price of the Y-axis. When the price of the commodity decreases from OP to OP1, the total outlay rises from OM to OM1. So, the elasticity of demand is more than unitary in such a case.

Total expenditure rises as price falls, in the elastic range of demand, i.e. Total expenditure falls as price falls in the elasticity range, i.e. Thus elasticity of demand is unitary in the AB range of DD, curve, elastic in the range AD above point A and less elastic in the BD1 range below point B. The conclusion is that price elasticity of demand refers to a movement along a specific demand curve. When the total expenditure decreases with reduction in price or when the total expenditure increases with an increase in price, the elasticity of demand is less than unitary elastic. Point elasticity method is used to measure the elasticity of demand at a point on a demand curve when the change in price is very small.