Question

The price of a commodity falls from ₹15 to ₹10. As a result, demand rises from 100 units to 150 units, Use the expenditure method to find the price elasticity of demand.

Answer 1

Calculate Initial and New Expenditure

Initial Price (P1): ₹15
New Price (P2): ₹10
Initial Quantity Demanded (Q1): 100 units
New Quantity Demanded (Q2): 150 units

Initial Expenditure (E1): E1 = P1 × Q1 = ₹15 × 100 = ₹1500

New Expenditure (E2): E2 = P2 × Q2 = ₹10 × 150 = ₹1500

Expenditure Method: This method states that if the total expenditure remains the same when the price changes, the demand is unitary elastic (Ed = 1).

In this case, since the initial expenditure (₹1500) is equal to the new expenditure (₹1500), the price elasticity of demand is unitary elastic (Ed = 1).