Elasticity and Total Expenditure
We know that quantity demanded increases as price falls, but what
happens to the total expenditure on that product? It turns out that the
response of total expenditure depends on the price elasticity of demand.
To see the relationship between the elasticity of demand and total
expenditure, we begin by noting that total expenditure at any point on
the demand curve is equal to price times quantity:
Because price and quantity move in opposite directions along a demand
curve, the change in total expenditure is ambiguous if all we know about
the demand curve is that it has a negative slope. The change in total
expenditure depends on the relative changes in the price and quantity. As
an example, consider a price decline of 10 percent. If quantity demanded
rises by more than 10 percent (elastic demand), then the quantity change
will dominate and total expenditure will rise. In contrast, if quantity
demanded increases by less than 10 percent (inelastic demand), then the
price change will dominate and total expenditure will fall. If quantity
demanded increases by exactly 10 percent (unit elastic demand), then the
two percentage changes exactly offset each other and total expenditure
will remain unchanged.
Totalexpenditure=Price×Quantity