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Read this article to learn about the relationship between price elasticity of demand and total expenditure of demand! The price elasticity of demand for a good and the total expenditure made on the good are greatly related to each other. At times, it becomes important to determine the effect on the expenditure on a good due to change in price of the good.  Image Courtesy : outsidethebeltway.com/wp-content/uploads/2012/06/economy.jpg We know that the price of a good and the demand for the good are inversely related to each other. So, responsiveness of demand in relation to change in price (i.e. price elasticity of demand) determines the change in expenditure. 1. Elasticity is more than One (Ed > 1):When demand is elastic, a fall in the price of a commodity results in increase in total expenditure on it. On the other hand, when price increases, total expenditure decreases. It means, in case of highly elastic demand, price and total expenditure move in the opposite directions. Table 4.1: Highly Elastic Demand
In Table 4.1, Ed > 1 because total expenditure rises with fall in price. 2. Elasticity is less than One (Ed < 1):When demand is inelastic, a fall in the price of a commodity leads to fall in total expenditure on it. On the other hand, when price increases, total expenditure also increases. It means, in case of less elastic demand, price and total expenditure move in the same direction. Table 4.2: Less Elastic Demand
In Table 4.2, Ed < 1 because total expenditure also falls with fall in price. 3. Elasticity is equal to One (Ed = 1):When demand is unitary elastic, a fall or rise in the price of the commodity does not change the total expenditure. It means, total expenditure will remain unchanged in case of unitary elastic demand. Table 4.3: Unitary Elastic Demand
In Table 4.3, Ed = 1 because total expenditure remains same even after fall in price. Total Expenditure Method: Price Elasticity of demand can also be calculated by Total Expenditure Method. This method was suggested by Prof. Marshall. This method is also known as Total Outlay or Total Revenue method. Under this method, price elasticity is measured by comparing Total Expenditure (TE) on the commodity before and after the change in price. It has three possibilities: (i) Ed > 1, if TE is inversely related to the price. (ii) Ed < 1, if TE is directly related to the price. (iii) Ed = 1, if TE does not change with change in price. The three cases are diagrammatically shown in Fig. 4.3. Limitation of this Method: Total Expenditure method suffers from one defect. It fails to give the exact magnitude of elasticity. By this method, we can only know whether the elasticity is equal to one, greater than one or less than one. Hence, this method is restrictive and provides only a rough measure of elasticity. What happens when elasticity of demand is less than 1?Elasticity is less than One (Ed < 1): When demand is inelastic, a fall in the price of a commodity leads to fall in total expenditure on it. On the other hand, when price increases, total expenditure also increases. It means, in case of less elastic demand, price and total expenditure move in the same direction.
When does the total expenditure on the commodity increase or decrease?(i) Total expenditure on the commodity increases when own price of the commodity decreases, and (ii) Total expenditure on the commodity decreases when own price of the commodity increases. Fig. 5 illustrates this situation: Area OCRP 1 > Area OBTP. Implying that total expenditure increases in response to decrease in price of the commodity.
What happens to total expenditure when demand is inelastic?When demand is inelastic, a fall in the price of a commodity leads to fall in total expenditure on it. On the other hand, when price increases, total expenditure also increases.
Why does expenditure increase when the price of a product increases?As demand is inelastic, demand does not respond to the change in price, now when the price rises the expenditure also increases since we know, expenditure is the product of price and quantity demanded. Was this answer helpful?
How does total expenditure affect the price elasticity of demand?When demand is elastic, a fall in the price of a commodity results in increase in total expenditure on it. On the other hand, when price increases, total expenditure decreases. It means, in case of highly elastic demand, price and total expenditure move in the opposite directions.
When expenditure increases with the increase in price of the commodity the demand is?An increase in the price of a commodity when demand is inelastic, causes the total expenditure of the consumers of the commodity to increase because when the demand is inelastic the quantity demand remains same but as the price increases the total expeniture also rises as total expenditure is measured by multiplying ...
When total expenditure remains constant with increase or decrease in price elasticity of demand is?Total expenditure = Commodity Price x Commodity demandOnly three degrees of the elasticity of demand can be calculated by this method. I. Equal to unit Elasticity – When total expenditure remains constant due to increase or decrease in price elasticity of demand is equal to unity.
What happens to total expenditure on a commodity when its price falls and its demand is price elastic?When the demand for a commodity is price elastic and the price of the commodity falls the in such a situation the total expenditure on the commodity rises.
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When total expenditure increases in response to decrease in the price of the commodity the elasticity of demand is?
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