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Question
The price of a commodity falls from ₹15 to ₹10. As a result, demand rises from 100 units to 150 units, Use the expenditure method to find the price elasticity of demand.
Solution
Calculate Initial and New Expenditure
Initial Price (P1): ₹15
New Price (P2): ₹10
Initial Quantity Demanded (Q1): 100 units
New Quantity Demanded (Q2): 150 units
Initial Expenditure (E1): E1 = P1 × Q1 = ₹15 × 100 = ₹1500
New Expenditure (E2): E2 = P2 × Q2 = ₹10 × 150 = ₹1500
Expenditure Method: This method states that if the total expenditure remains the same when the price changes, the demand is unitary elastic (Ed = 1).
In this case, since the initial expenditure (₹1500) is equal to the new expenditure (₹1500), the price elasticity of demand is unitary elastic (Ed = 1).
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