Page 121 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes Measurement of Elasticity of Demand can be cleared by Table 5:

Table 5: Total Expenditure Method
Price of Purchased Total Expenditure Change in total Elasticity of
Commodity ( ) Quantity (Kg) ( ) expenditure Demand
2 4 8 Total expenditure Unitary Elastic
does not change.
4 2 8
1 8 8
2 4 8 When price Greater than
increases, total Unitary Elastic or
expenditure Elastic
decreases.
4 1 4 When price
decreases, total
expenditure
increases.
1 10 10
2 3 6 When price Less than Unitary
increases, total Elastic or Inelastic
expenditure
increases.
4 2 8 When price
decreases, total
expenditure
decreases.
1 4 4

Following information is known from Table 5—
(i) Unitary Elastic Demand: We come to know from first part of table 5 that when price of commodity
is 2 then total expenditure on commodity is 8. Opposite to it when price increases to 4 or
decreases to 1, then also total expenditure remained 8. In other words, total expenditure is
not affected by changing price.
(ii) Greater than Unitary Elasticity: We come to know from second part of table 5 that when price
of commodity is 2 then total expenditure on commodity is 8. If price increases to 4, then
total expenditure decreases to 4 from 8 and when price decreases to 1 then total expenditure
increases to 10. In other words, total expenditure changes in the opposite direction on
changing prices.
(iii) Less than Unitary Elasticity: We come to know from third part of table 5 that when price
of commodity is 2 then total expenditure on commodity is 6. If price increases to 4,
then total expenditure increases to 8. When price decreases to 1 then total expenditure
decreases to 4. In other words, total expenditure changes in the same direction on
changing prices.
Total Expenditure Method of measuring elasticity of demand can be cleared by Fig. 6.18. In this figure,
total expenditure is shown on OX-axis and price is shown on OY-axis. ST curve is total expenditure
curve. BC portion of ST curve represents the unitary elasticity. We come to know that when price is
OM, then total expenditure is MC. When price increases to ON then total expenditure is NB (= MC)
means remains the same as before. TB portion of ST curve representing greater than unitary elasticity. It

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