Question

When price of a good rises from ₹ 5 per unit to ₹ 6 per unit, its demand falls from 20 units to 10 units. Use the Expenditure Method of measuring price elasticity of demand to determine whether demand is elastic or inelastic.

Answer 1

Initial Price P₁ = ₹ 5,

Quantity Q₁ = 20

New Price P₂ = ₹ 6,

Quantity Q₂ = 10

Initial Expenditure E₁ = P₁ × Q₁ = 5 × 20 = ₹ 100

New Expenditure E₂ = P₂ × Q₂ = 6 × 10 = ₹ 60

Price increased (from ₹ 5 to ₹ 6)

Expenditure decreased (from ₹ 100 to ₹ 60)

When price and total expenditure move in opposite directions, demand is elastic.