Prof. Marshall
works out a relationship between price elasticity of demand and total expenditure.
He estimates the
degree of price elasticity of demand depending on the change in total
expenditure following a change in own price of the commodity.
He observes three different situations :
1) If the rise or fall in own price of a commodity causes no change in total expenditure on the commodity,
He observes three different situations :
1) If the rise or fall in own price of a commodity causes no change in total expenditure on the commodity,
then elasticity of demand is
unitary i.e. unitary elastic demand.
2) If a fall in own price of the commodity causes a
rise in total expenditure and a rise in price causes a fall in total
expenditure on the commodity,
then elasticity of demand is greater than unitary i.e. elastic demand.
then elasticity of demand is greater than unitary i.e. elastic demand.
3) If a fall in own price of the commodity causes a
fall in total expenditure and a rise in price causes a rise in total
expenditure on the commodity,
then elasticity of demand is less than unitary i.e. inelastic demand.
then elasticity of demand is less than unitary i.e. inelastic demand.
Relationship
between price elasticity of demand and Total expenditure -
When price of the commodity falls
When price of the commodity falls
situation
|
Price
(Rs.)
(falls)
|
Quantity
(kg)
|
Total
expenditure
(Rs)
|
Change
in
Total
expenditure
|
Elasticity
Of
demand
|
1
|
2
1
|
4
8
|
8
8
|
Constant
|
ep = 1,
unitary elastic
|
2
|
2
1
|
4
10
|
8
10
|
Increases
|
ep > 1,
elastic
|
3
|
2
1
|
3
4
|
6
4
|
decreases
|
ep < 1,
inelastic
|
