Measurement Of Price Elasticity Of Demand three methods of measuring price elasticity of demand.
(1) Total revenue method
(2) Geometrical method
These three methods are now discussed in brief.
(1) Total revenue method (also called total expenditure method). The total revenue method finds total revenue (total expenditure) by multiplying the quantity sold by the selling price of the good. When a firm increases the price of a good, will its total sales revenue increase or decrease? Well, this depends upon the elasticity of demand for the good. For example, if the demand for a good is elastic or (> 1), a rise in the price of a good decreases its total revenue and a decrease in price increases the total revenue of the firm. If the demand for the good is inelastic (< 1), a rise in the price of a good increase total revenue and a fall in price decreases total revenue of the firm. In case the elasticity of demand for the good is equal to unity, a rise or fall in price of good leaves total revenue unchanged. The total revenue methods is now explained with the help of curves below:
) Elastic demand. When demand for a good is elastic (Ed > 1), price and total revenue move in the opposite direction as shown in Figure 6.6. A rise in price lowers total revenue and a fall in price increases cc total revenue. When demand is elastic, the
greater than the percentage in price. For 10 E——– 4
example, when price of a good is Rs. 20 per unit the quantity demanded is ten units. The total revenue is Rs.200. (20 x 10) A fall in the price of good from Rs. 20 per unit to Rs. 10 per unit, increases the demand for a good to 30 unitsand increases total revenue to Rs. 300 (10 x 30).
When the demand for a good Is inelastic (Ed < 1), the percentage
change in quantity demanded is less than
the percentage change in price as is shown 6 – ,
in figure 6.7. When price of the good is Rs. (7; 5 A _ _ _
5 per unit, the quantity demand is 60 units, P-5– 4 – the total revenue of the firm is Rs. 300 (60 .?..>
x 5). When price falls to Rs. 2, demand for a. 2 E
Unitary Elastic demand
demand for a good is unitary elastic (Ed = 1) i.e., it is equal to one. A rise or fall in price leaves total revenue unchanged as — is shown in figure. 6.8. When the price of a CI good is Rs. 10 quantity demanded is 30 ;10 units. The total revenue is Rs. 300 (10 x 6: also Rs. 300 (5 x 60). The percentage change in quantity demanded equals the percentage change in price..20). At price of Rs. 5, the total revenue is
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