When as a result of increase in price of good total expenditure made in good falls price elasticity of demand is?

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.

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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.