Total Outlay Method : This method was introduced by Dr. Alfred Marshall. The limitation of this method is that in this method unlike ratio method, the exact numerical value of the elasticity of demand cannot be determined. According, to this method, the elasticity of demand is measured on the basis of expenditure incurred by consumer when the price of a commodity changes.
Total outlay or total expenditure can be calculated by multiplying the price with the quantity demanded (Price x Quantity demand = Total Expenditure). Depending upon the kind of change in total outlay, whether it increases, or decreases, or remain constant with the change in price we will be able to decide the type of elasticity.
This can be explained with the following example :-
1. If the total outlay remains the same with a rise or fall in price then the demand is said to be unitary (e = 1) elastic.
2. If the total outlay decreases with a rise in price and increases with a fall in price, the elasticity of demand is greater than one or Relatively Elastic e > 1.
3. If the total outlay increases with a rise in price and decreases with a fall in price, then elasticity is less than one or relatively inelastic, e < 1.
