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Total Expenditure Method (Outlay Method) - Elasticity of Demand, CBSE Class 12 Commerce Video Lecture

FAQs on Total Expenditure Method (Outlay Method) - Elasticity of Demand, CBSE Class 12 Commerce Video Lecture

1. What is the total expenditure method (outlay method) for measuring elasticity of demand?

Ans. The total expenditure method, also known as the outlay method, is a technique used to measure the elasticity of demand. It calculates the percentage change in total expenditure resulting from a change in price. The formula for elasticity using this method is: Elasticity of Demand = (Percentage change in quantity demanded / Percentage change in price) x (Price / Quantity demanded)

2. How is the elasticity of demand calculated using the total expenditure method?

Ans. The elasticity of demand using the total expenditure method is calculated by dividing the percentage change in quantity demanded by the percentage change in price. This ratio is then multiplied by the ratio of the initial price to the initial quantity demanded. The formula is as follows: Elasticity of Demand = (Percentage change in quantity demanded / Percentage change in price) x (Price / Quantity demanded)

3. Why is the total expenditure method used to measure elasticity of demand?

Ans. The total expenditure method is used to measure elasticity of demand because it takes into account the change in both quantity demanded and price. By considering the change in total expenditure resulting from a change in price, it provides a comprehensive understanding of how sensitive demand is to price fluctuations. It helps businesses and economists analyze the impact of price changes on revenue and make more informed decisions.

4. How does the total expenditure method help in understanding consumer behavior?

Ans. The total expenditure method helps in understanding consumer behavior by analyzing how changes in price affect total expenditure and, consequently, demand. If the elasticity of demand is elastic (greater than 1), a decrease in price will result in a proportionally larger increase in quantity demanded, leading to an increase in total expenditure. On the other hand, if the elasticity of demand is inelastic (less than 1), a decrease in price will result in a proportionally smaller increase in quantity demanded, leading to a decrease in total expenditure. This information helps businesses understand how price changes can impact consumer purchasing patterns.

5. What are the limitations of the total expenditure method for measuring elasticity of demand?

Ans. The total expenditure method has some limitations. Firstly, it assumes that all other factors affecting demand remain constant, which may not be the case in reality. Secondly, it assumes a linear relationship between price and quantity demanded, which may not hold true for all goods and services. Additionally, the method does not consider the income effect and assumes that price changes do not affect consumers' purchasing power. These limitations highlight the need for considering other methods and factors when analyzing elasticity of demand.

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Sep 28, 2025 Last updated

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