demanded that are less than 30, elasticity of demand is greater than 1,
and hence any increase in quantity demanded will be proportionately
larger than the fall in price that caused it. In that range, total expenditure
increases as price falls. For quantities greater than 30, elasticity of demand
is less than 1, and hence any increase in quantity demanded will be
proportionately smaller than the fall in price that caused it. In that range,
total expenditure decreases as price falls. The maximum of total
expenditure ($180 in this case) occurs where the elasticity of demand
equals 1.
The world wheat market provides a good example of the relationship
between elasticity and total expenditure. This market is strongly
influenced by weather conditions in the major wheat-producing
countries. If one major wheat-producing country, like Russia, suffers a
significant failure in its wheat crop, the world supply curve for wheat
shifts to the left and the equilibrium world price rises. Because the world
demand for wheat is inelastic, the world’s total expenditure on wheat will
rise. In this case, even though many individual Russian wheat producers
will be worse off because their crop failed, the total income of the world’s
wheat producers will increase. One other observation is relevant: Wheat
producers in other countries, like Canada, benefit by selling their
(unchanged) crop at a higher world price. And the less elastic the world
demand for wheat, the more the price will rise as a result of the Russian
crop failure, and thus the more Canadian wheat farmers will benefit.