The Most Important Methods for Measuring the Price Elasticity of Demand are listed below:
1. Flux’s proportionality method:
This method is based on the definition of the price elasticity of demand
EPD = Proportional change in demand/Proportionate change in price
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ΔQ/ΔP × P/Q
It is known as Flux’s proportionality method of measuring the price elasticity of demand.
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2. Graphical or geometrical method:
This method is based on the slope of the demand curve. It is used for comparing the relative price elasticities of the demand curves. A steeper demand curve has a lower price elasticity and a flatter one, a higher price elasticity. Geometrical method is also used to measure price elasticity at a point on the demand curve. It gives price elasticity at the point as a ratio of the length of the lower segment to the upper segment.
3. Marshall’s total outlay method:
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This method is based on changes in total expenditures in consequence to changes in product prices. Table 2.3 demonstrates the method.
When total expenditure on a product varies directly with price, the price elasticity of demand is less than unitary (|EPD| < 1); when it varies inversely with price, the price elasticity of demand is more than unitary (|EPD| > 1) and when the total expenditure remains unaffected by price changes, the price elasticity is unitary (|EPD| = 1). These observations, demonstrated in Table 2.3, may be proved by calculus. Let the total expenditure (total outlay) be given as
Table 2.3:
| Individual A | Individual B | Individual C | |
| Price | Q TE | Q TE | Q TE |
| 5 | 20 100 | 20 100 | 20 100 |
| 4 | 22 88 | 25 100 | 30 120 |
| 2 | 30 60 | 50 100 | 75 150 |
| | EDP | < 1 | | EDP | = 1 | | EDP | < 1 |
Q represents quantity in units, TE represents total expenditure. Individual A reduces his expenditure from 100 to 60 as the price of the product falls. According to this method the price elasticity is numerically less than one.
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For individual B, total expenditure remains unchanged as the price falls. For him, price elasticity is unitary. In case of individual C, total expenditure increases as the price falls. Price elasticity for him is more than unitary. The method helps classification of price elasticity whether it is unitary, less than unitary or more than unitary.