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# Relationship between Price Elasticity of Demand and Total Expenditure

The proportionate change in the quantity demanded of a commodity due to a proportionate change in the price of the commodity is called Price Elasticity of Demand. However, Total Expenditure is Price times Quantity. There is a huge relationship between the price elasticity of demand for a commodity and the total expenditure made on it. Also, sometimes it is essential to evaluate the effect of change in price of a commodity on the total expenditure made on it. We already know that the price of a commodity and its demand are inversely related to each other. Therefore, responsiveness of demand in respect to the change in price of a commodity determines the change in expenditure.

### Relationship between Price Elasticity of Demand and Total Expenditure

To understand the relationship between Price Elasticity of Demand and Total Expenditure, let’s look into three of the following cases:

#### 1. Elasticity is more than One (Ed > 1):

When the demand for a commodity is elastic, a fall in its price increases the total expenditure on it. However, when the price of a commodity increases, there is fall in its total expenditure. In simple terms, if a commodity has highly elastic demand then its price and total expenditure made on it moves in opposite directions.

Example:

In the above example, price elasticity of demand is more than one because the total expenditure increases with a fall in price.

#### 2. Elasticity is less than One (Ed < 1):

When the demand for a commodity is inelastic, a fall in its price reduces the total expenditure on it. However, when the price of a commodity falls, there is an increase in its total expenditure. In simple terms, if a commodity has less elastic demand then its price and total expenditure made on it moves in the same direction.

Example:

In the above example, price elasticity of demand is less than one because the total expenditure decreases with a fall in price.

#### 3. Elasticity is equal to One (Ed = 1):

When the demand for a commodity is unitary elastic, a fall in its price does Expenditure is Price times Quantity. There is a huge relationship between the price elasticity of demand for a commodity and the total expenditure made on it. Also, sometimes it is essential to evaluate the effect of change in price of a commodity on the total expenditure made on it. We already know that the price of a commodity and its demand are inversely related to each other. Therefore, responsiveness of demand in respect to the change in price of a commodity determines the change in expenditure not change the total expenditure on it. Similarly, an increase in its price also does not affect the total expenditure made on it. In simple terms, if a commodity has unitary elastic demand, then no matter if the price increases or decreases, the total expenditure made on it remains unchanged.

Example:

In the above example, the price elasticity of demand is equal to one because the total expenditure remains the same no matter if the price falls or rises.

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