Question 3 (b)
A fall in the price of X with elastic demand: total expenditure rises
6 marks
- Time to write
- About 12 minutes
Question
Question 3 (b) · 6 marksWill a fall in the price of X lead to an increase or a decrease in the total expenditure on X, if the demand for X is elastic? Explain.
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- ExplainA statement to explain: say what it means first, then build the answer around it.
What the paper leaves open
"X" is the good X of Q3 (a); this slot does not repeat that stem.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 The answer, total expenditure increases 1 mark 2 min
- 2 Total expenditure as price times quantity, and the meaning of elastic demand 1½ marks 3 min
- 3 The reasoning, the quantity effect outweighs the price effect 2 marks 3 min
- 4 Example and the contrast with other elasticities 1½ marks 2 min
- Check: every ask answered, key terms underlined 1 min
Short on time? Trim steps 2–4 evenly rather than skip one: each is capped at its own marks.
Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
The answer in one line. If the demand for X is elastic, a fall in its price increases the total expenditure on X.
Total expenditure and elasticity. Total expenditure on a good (which is the same as sellers' total revenue from it) is price × quantity. Price elasticity of demand compares the percentage change in quantity demanded with the percentage change in price: eD = (% change in Q) ÷ (% change in P), read without its sign. Demand is elastic when the percentage change in quantity is larger than the percentage change in price, so that eD is greater than 1.
Why spending rises when demand is elastic. A fall in price pulls total expenditure in two opposite directions:
- The price effect: each unit now costs less, which on its own lowers spending.
- The quantity effect: buyers purchase more units, which on its own raises spending.
With elastic demand the quantity effect is the stronger of the two: the percentage rise in quantity is greater than the percentage fall in price, so price × quantity goes up. In general, when demand is elastic, spending moves in the opposite direction to the price: it rises when the price falls and falls when the price rises.
Example (our own). An online seller cuts the price of a pair of wireless earphones from ₹2,000 to ₹1,800, a fall of 10%, and weekly sales rise from 500 to 600 pairs, a rise of 20%.
- eD = 20% ÷ 10% = 2, so demand is elastic.
- Total expenditure before = ₹2,000 × 500 = ₹10,00,000.
- Total expenditure after = ₹1,800 × 600 = ₹10,80,000. Buyers together spend ₹80,000 more a week, although each pair is cheaper. Goods with close substitutes, such as one brand among many, tend to have elastic demand like this, because buyers switch towards whichever brand has become cheaper.
The contrast with inelastic demand. The result depends on elasticity. If demand for X were inelastic, the percentage rise in quantity would be smaller than the percentage fall in price, and total expenditure would fall; if demand were unit elastic, the two changes would cancel and expenditure would stay the same.
| Elasticity of demand for X | Effect of a fall in price on total expenditure |
|---|---|
| Elastic (greater than 1) | Increases |
| Unit elastic (equal to 1) | Unchanged |
| Inelastic (less than 1) | Decreases |
Conclusion. When the demand for X is elastic, a fall in its price leads to an increase in total expenditure on X, because the percentage increase in the quantity bought outweighs the percentage fall in price.
Where the 6 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | The answer, total expenditure increases | 1 |
| 2 | Total expenditure as price times quantity, and the meaning of elastic demand | 1.5 |
| 3 | The reasoning, the quantity effect outweighs the price effect | 2 |
| 4 | Example and the contrast with other elasticities | 1.5 |
| Total | 6 |
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