Elasticity and consumption expenditure, Managerial Economics

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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 (e_ce)	Price change M	Marginal Expenditure	Total Consumer
Elasticity (e_ce)	Price change M	Expenditure	Total Consumer
e_ce< 1	Rise	ME < 1	Decreases
e_ce< 1	Fall	ME > 1	Increases
ece = 1	Rise	ME = 1	Constant
ece = 1	Fall	ME = 1	Constant
ece > 1 R	Rise	ME < 1	Increases
ece > 1 R	Fall	ME < 1	Decreases

As illustrated in Table above, when e_ce> 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 e_ce = 1, a rise (or fall) in price causes a proportionate fall (or rise) in quantity demanded leaving total expenditure unchanged.

When e_ce< 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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