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The relationship between, total expenditure and price elasticity of demand has summed up in the below table:
Table: Elasticity and Consumption Expenditure
Elasticity
(ece)
Price change M
Marginal Expenditure
Total Consumer
Expenditure
ece< 1
Rise
ME < 1
Decreases
Fall
ME > 1
Increases
ece = 1
ME = 1
Constant
ece > 1 R
As illustrated in Table above, when ece> 1, for example demand is elastic, an increase in price causes more than proportionate decrease in quantity demanded. Therefore, total expenditure decreases. And, if price decreases quantity demanded increases more than proportionately. Consequently total expenditure increases.
When ece = 1, a rise (or fall) in price causes a proportionate fall (or rise) in quantity demanded leaving total expenditure unchanged.
When ece< 1, it implies when demand is inelastic, a rise in price causes a rise in the total expenditure since demand decreases less than proportionately and a fall in price decreases it as quantity demanded increases less than proportionately.
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