ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A fall in price increases expenditure on the product.
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A fall in price increases quantity demanded.
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A rise in price increases expenditure on the product
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A rise in price reduces quantity demanded.
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Detailed explanation-1: -As a rule of thumb, if the quantity of a product demanded or purchased changes more than the price changes, then the product is considered to be elastic (for example, the price goes up by 5%, but the demand falls by 10%).
Detailed explanation-2: -When demand is inelastic, a fall in the price of a commodity leads to fall in total expenditure on it. On the other hand, when price increases, total expenditure also increases. It means, in case of less elastic demand, price and total expenditure move in the same direction. Hence, correct answer is option B.
Detailed explanation-3: -If the demand for a good is price elastic (E>1), a fall in price will lead to a rise in total expenditure on the good as per the total outlay method of measuring elasticity of demand. Was this answer helpful?
Detailed explanation-4: -Elastic demand will mean that when price falls, demand will increase by a greater percentage than the price decreased. This means an increase in revenue. Inelastic demand will mean that when price increases, demand will fall by a smaller percentage than the price increased.
Detailed explanation-5: -When the price elasticity of demand is perfectly elastic (Ed is − ∞), any increase in the price, no matter how small, will cause the quantity demanded for the good to drop to zero. Hence, when the price is raised, the total revenue falls to zero.