Question

How does the total expenditure affect the price elasticity of demand?

Answer 1

The total expenditure method plays a key role in understanding price elasticity of demand, which measures how much the quantity demanded of a good changes in response to a change in its price. According to this method, if a decrease in the price of a commodity leads to an increase in total expenditure on it, then the demand is said to be elastic (Ed > 1). Conversely, if total expenditure remains unchanged with a change in price, the demand is unitary elastic (Ed = 1). And if a fall in price causes total expenditure to decrease, the demand is inelastic (Ed < 1). This approach helps in understanding consumer responsiveness and assists businesses and policymakers in pricing strategies, as it indicates how revenue will be affected by price changes.