If fall in price of a commodity causes total expenditure (or total revenue) to increase, demand for the good is elastic (ep > 1). 2. If fall in price of a commodity causes total expenditure (or total revenue) on a commodity to decrease, demand for the commodity is inelastic (ep < 1).
When total expenditure on the commodity remains constant price elasticity of demand also remains constant no matter price of the commodity increases or decreases explain?
Hence, elasticity of demand is less than unity (or Ed < 1). Situation 3 – Ed = 1 (Unitary Elastic Demand): It is a situation when total expenditure on the commodity remains constant, no matter price of the commodity increases or decreases.
What happens when price falls and demand elastic?
If demand is elastic at a given price level, then should a company cut its price, the percentage drop in price will result in an even larger percentage increase in the quantity sold—thus raising total revenue.
What happens when the price of a commodity falls?
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. Price (in Rs.)
How is price elasticity of demand related to total expenditure?
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.
What happens to total expenditure when price rises?
According to the rules in Table 1, we expect a price rise to increase total expenditure, and that is exactly what happens: The $500 rise in price causes total expenditure to increase from $600 million to $750 million. When price rose from $3,000 to $3,500, however, demand was elastic (ED = —4.33).
When does demand for a commodity become elastic?
When demand is elastic (ep >1): When demand for a commodity is elastic (e p > 1), the percentage increase in quantity demanded of the commodity will be greater than the percentage fall in price that caused the former. As a result, total revenue will increase following the reduction in price of the commodity.
