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Total outlay method

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Total outlay method

Total outlay method is the major method of measuring price elasticity of demand. It is also generally known as total expenditure method. In this method, elasticity is measured by comparing the total expenditure of the consumer during the change in the price of commodities.

According to Alfred Marshal, “Elasticity of demand can be measured by considering the change in price and the subsequent change in the total quantity of goods purchased and the total amount of money spent on it.”

Price elasticity of demand can be measured on the following three bases:-
  • The elasticity of demand greater than unity (Ep>1)

If the total outlay of a commodity increases due to a small fall in price, then the price elasticity of demand is said to be greater than 1. Hence, the total expenditure and price of a commodity are inversely related to each other.
  • The elasticity of demand equal to unity (Ep=1)

If the total expenditure of a commodity is totally irresponsive to the change in price then the price elasticity of demand is said to be equal to unity .I. e Whatever the price of a commodity is total expenditure remains constant.
  • The elasticity of demand less than unity (Ep <1)

If the total expenditure of a commodity falls due to falling in price then the price elasticity of demand is said to be less than one. I.e., both total expenditure and price move in the same direction.
The above cases are prescribed in the table given below:

Price(P)

Quantity demanded(Q)

Total expenditure(P× Q)

Elasticity

10110Ep>1
Ep>1
8216
6424Ep=1
Ep=1
4624
2816Ep <1
Ep <1
11010
In the above table, quantity demanded of a commodity is increasing and the price of a commodity is decreasing. Total expenditure is rising at first and remains constant for some time and starts declining later on. It can also be explained by the help of the following diagram:
Total outlay method

In the above figure price and total expenditure/ Outlay are shown along y-axis and x-axis respectively. Point A and B shows the inverse relationship between price and total expenditure. Point B and C are parallel to price. There is no change in total expenditure on the points although the price changes. Point C and D show a positive relationship between price and total expenditure.

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