Question

State with reasons whether you agree or disagree with the following statements.

Total outlay method is one of the methods of measuring Elasticity of Demand.

Answer 1

Total outlay or the total expenditure method is one of the methods of measuring elasticity of demand. Under this method, we examine how the total expenditure or total outlay incurred on the good changes with a change in its price. Total outlay or total expenditure of a good is defined as the product of its price and the quantity demanded at that price. Algebraically,

Total outlay = Price × Quantity Demanded

There can be following three possible situations of total expenditure.

1. If with a rise (or fall) in the price of good, the total expenditure remains constant, then demand for the good is said to be unitary elastic i.e. |e_d|= 1.

2. If with a rise (or fall) in the price of a good, the total expenditure falls (or rises), then demand for the good is said to be greater than unitary elastic i.e. |e_d| > 1.

3. If with a rise (or fall) in the price of a good, the total expenditure rises (or falls), then demand for the good is said to be less than unitary elastic i.e. |e_d|< 1.