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Question
Study the table given below and state whether demand is elastic or inelastic. Give reasons for your answer.
| Price in (₹) | Total outlay (₹) |
| 5 | 25 |
| 3 | 18 |
Solution
We can use the total expenditure (or outlay) method to determine whether the demand is elastic or inelastic. This method analyzes how the total expenditure changes when the price of a commodity changes.
Given Data
- Initial Price (P1): ₹5
- New Price (P2): ₹3
- Initial Total Outlay (E1): ₹25
- New Total Outlay (E2): ₹18
Analysis:
Total Outlay Method: According to this method:
- Elastic Demand: If the total expenditure (total outlay) decreases when the price decreases, demand is elastic (Ed > 1).
- Inelastic Demand: Demand is inelastic if the total expenditure decreases when the price decreases (Ed < 1).
- Unitary Elastic Demand: If the total expenditure remains unchanged as the price changes, the demand is unitary elastic (Ed = 1).
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