Measurement Of Price Elasticity of Demand (class 12) - YouTube

Hi friends! In our previous video we learnt different types of price elasticity of demand. However

we didn’t study how to measure these elasticity’s. And that is exactly what we’ll be doing

today.

There are three methods through which we can calculate price elasticity. The first method

is ratio or proportionate method. It was developed by Alfred flux. Hence many a times this method

is regarded as the flux method. If you divide percent change in quantity demanded

by the percent change in price of the commodity, you end up getting the elasticity. True it

is simple as that. To understand this, look at the downward sloping

demand curve, where quantity demanded of chocolates are plotted on x axis and prices on y axis.

Say the price a chocolate is rupees 100 and at that price you demand 1000 chocolates.

However, later the price of the chocolate falls to 50; hence you demand more of it.

Say 1500 chocolates. Let’s write this in a tabular form. So with respect to our formula

the change in price from 100 to 50 is 50%. And the percent change is quantity from 1000

to 1500 is also 50%. Hence, the price elasticity of demand for our chocolate is equal to 1.

Or in other words its unitary elastic. Wooh!!! I just don’t understand why people hate

economics. It’s so easy!

The second method to calculate price elasticity is the total expenditure or the total outlay

method. It was given by none other than Professor Alfred Marshall. As the name suggest we have

to deal with expenditure in this method. The best way to understand this is with the help

of the following schedule. Look carefully at all the columns. The first column suggests

the change in price of chocolate. The next column suggests how demand changes with change

in price. And the last column shows your total expenditure after the change in price.

Now look at the first row. Here the price of the chocolate is rupee 10 and at 10 rupees

12 chocolates have been bought. So, the total expenditure is 10*12 that is 120. When price

of chocolate falls to rupees 8, you buy more chocolates. In this case 15. And your total

expenditure will be 8*15 , that is 120. Notice that irrespective of change in price, you’re

spending on the chocolate remains the same. Hence, the elasticity of our chocolate in

this case will be equal to 1. Or we can call it unitary elastic.

Similarly say if the price of the chocolate falls from 10 to 8. And your quantity demanded

increases from 12 to 20 then your total expenditure will increase by 8*20 that is 160.

Here, your elasticity will be 160 upon 120 which is greater than one. Hence we call such

demands as relatively elastic demands. And last but not the least when your ratio

of expenditures is less than 1, we call it relatively inelastic demand.

The last way to measure elasticity is the point proportionate method or geometric method.

This method was also developed by Alfred Marshall. At any point on the demand curve elasticity

is measured using this formula. Segment of demand curve below a given point divided by

segment of demand curve above the given point. To understand this look at the following diagram.

Let us assume that the demand curve below has a length of 4cm. When the price is p the

quantity demanded is 0. Which means at point p the demand is infinitely elastic or perfectly

elastic. Similarly, the closer you get to point p4 the more inelastic demand curve gets.

And at p4 the demand curve is perfectly inelastic. Watch the previous video in this playlist

to understand elasticity of demand properly. Now let’s say I take point p2 right in the

centre of our demand curve and apply this formula i.e. the lower segment of the demand

curve which is 2 cm divided by the upper segment which is also 2cm. We get our answer equal

to 1. Which means at point p2 the demand is unitary elastic.

Now let’s take another point. Say p1 such that the lower segment is 3cm and upper is

1cm. And apply the formula. Lower segment divided by the upper segment. You get the

answer as 3, and 3 is more than one. This means that at point p1 the demand is relatively

elastic. Similarly take point p3 now and apply the

formula. And you will get an answer less than 1. Hence at point p3 we have a relatively

inelastic demand.

Friends! These were certain ways through which we can measure price elasticity of demand.

I hope you enjoyed the video. If u did then do like comment share and subscribe

Until then,

Adios Hasta la Vista.