Write a short note on Total expenditure method of measuring Elasticity of Demand.
Write a short note on Total expenditure method of measuring Elasticity of Demand.
The elasticity of demand refers to how sensitive the demand for a good is to differences in other economic variables, such as cost prices and customer benefits. Higher demand elasticity for an economic variable indicates that customers are more conscious of changes in this variable.
Measurement of Price Elasticity of Demand
There are mainly three methods of measuring price elasticity of demand which are listed below:
- Proportionate/Percentage Method
- Total Expenditure or Total Outlay Method
- Geometric Method
Expenditure method
The expenditure method of calculating National Income or Gross Domestic Product mainly deals with the final goods and services produced in a country during a period of time. The formula for calculating national expenditure is
National Income = C + I + G + (X−M)
Where,
C = Consumption by residents of the nation
I = Investment
G = Government spending
X = Exports
M = Imports Or
National Income = C + I + G + NX
Where, Net Exports (NX) = Exports – Imports
However, the expenditure method excludes expenditures that are done on the purchase of shares and bonds and second-hand goods.
The elasticity of demand refers to how sensitive the demand for a good is to differences in other economic variables, such as cost prices and customer benefits. Higher demand elasticity for an economic variable indicates that customers are more conscious of changes in this variable.
Measurement of Price Elasticity of Demand
There are mainly three methods of measuring price elasticity of demand which are listed below:
- Proportionate/Percentage Method
- Total Expenditure or Total Outlay Method
- Geometric Method
Expenditure method
The expenditure method of calculating National Income or Gross Domestic Product mainly deals with the final goods and services produced in a country during a period of time. The formula for calculating national expenditure is
National Income = C + I + G + (X−M)
Where,
C = Consumption by residents of the nation
I = Investment
G = Government spending
X = Exports
M = Imports Or
National Income = C + I + G + NX
Where, Net Exports (NX) = Exports – Imports
However, the expenditure method excludes expenditures that are done on the purchase of shares and bonds and second-hand goods.
