Under which method of price elasticity of demand , one finds out how much and in what direction total expenditure changes as a result of change in the price of a commodity?
Answer & explanation
Correct answer: option 1
The correct answer is Option 1: total outlay method
Total outlay method is another name of total expenditure method. Under this the price elasticity of demand is measured by observing the direction of change in total expenditure caused due to change in the price of the commodity. If the total expenditure falls with fall in price i.e. TE and price are in the same direction that means it is less than unitary elastic whereas, if the total expenditure rises with fall in prices i.e. TE and price are in the opposite direction that means it is more than unitary elastic.