Lecture Notes: Business Economics Types of Elasticity of Demand

TOTAL EXPENDITURES (TE)

Amount spent on the purchase of a commodity

Total Expenditures = Price x Quantity Bought

TE = P x Q

TOTAL REVENUE (TR)

Amount Realized by the sale of a commodity

Total Revenues = Price x Quantity Sold

TR = P x Q

Total Expenditure Method

Total expenditure method is not a method to compute elasticity of demand like

we computed using ARC Elasticity Method or Point Elasticity method. It shows
relationship between Total Expenditures and Elasticity of Demand.

QUANTITY TOTAL
POINTS PRICE DEMANDED EXPENDITURES Ed
(P) (Q d ) (TE = P x Q)
A 8 0 0 α
B 7 100 700 7
C 6 200 1200 3
D 5 300 1500 1.667
F 4 400 1600 1
G 3 500 1500 0.6
H 2 600 1200 0.33
I 1 700 700 0.142
J 0 800 0 0

Prepared by: Dr Noman Saeed Email: economanics@yahoo.com

Lecture Notes: Business Economics Types of Elasticity of Demand

Prepared by: Dr Noman Saeed Email: economanics@yahoo.com

Lecture Notes: Business Economics Types of Elasticity of Demand

Relationship between TE / TR and E d

• When demand is Elastic, a decrease in price will increase the Revenues

or Expenditures
• When demand is Inelastic, an increase in price will increase the
Revenues or Expenditures
• When demand is Unitary Elastic, Total Expenditures are maximum

Revenue Gain > Revenue Loss ⇒ Net Gain in Revenues

Prepared by: Dr Noman Saeed Email: economanics@yahoo.com

Lecture Notes: Business Economics Types of Elasticity of Demand

Revenue Gain > Revenue Loss ⇒ Net Gain in Revenues

Revenue Gain = Revenue Loss ⇒ Total Revenues will

remain unchanged
Prepared by: Dr Noman Saeed Email: economanics@yahoo.com
Lecture Notes: Business Economics Types of Elasticity of Demand

Cross Elasticity of Demand (E xy )

E xy is the relative responsiveness of quantity demanded of X due to the

change in price of Y

• If E xy is positive goods are SUBSTITUE GOODS

• If E xy is negative goods are COMPLEMENTS
• If E xy is ZERO goods are INDEPENDENT

Prepared by: Dr Noman Saeed Email: economanics@yahoo.com

Lecture Notes: Business Economics Types of Elasticity of Demand

NORMAL GOOD (GOOD GOODS)

More is preferred over less

“MORE IS BETTER”

• Luxuries
• Necessities

INFERIOR GOOD

Consumption of the commodity decreases as income Increases

GIFFEN GOOD

Most inferior Good

Prepared by: Dr Noman Saeed Email: economanics@yahoo.com

Lecture Notes: Business Economics Types of Elasticity of Demand

Income Elasticity of Demand (E M )

E M is the relative responsiveness of quantity demanded due to the

change in Income

• If E M is positive Good are Normal Good

o If EM is positive but less than one, Goods are NECESSITIES
o If EM is greater than one, Goods are LUXURIES
• If E M is negative Good are Inferior Good

Prepared by: Dr Noman Saeed Email: economanics@yahoo.com