Suppose there was a 4% decrease in the price of the good, and as a result, the total expenditure on the goods increased by 2%. What can you say about the elasticity of demand?

Price elasticity of demand is greater than 1

The correct answer is Option 2: Price elasticity of demand is greater than 1

Decrease in price= 4%, Rise in expenditure= 2%

This implies that due to a reduction in price, the overall expenditure has increased. This implies that the percentage of change in demand has increased more than the percentage decrease in price.

Thus elasticity = % change in demand / % change in price.

The numerator is more than the denominator. This means that elasticity is more than 1. We can say that small change in price has led to a bigger change in demand and as a result the demand is elastic.

E.x: Suppose the price of a good falls from ₹100 to ₹96 (a 4% decrease). Earlier, if 10 units were bought, the total expenditure was ₹1000. After the price falls to ₹96, let’s say the quantity demanded increases to 11 units. The new total expenditure is ₹1056 (96 × 11), which is an increase of 5.6%. This rise in total expenditure confirms that the percentage rise in quantity demanded is more than the percentage fall in price, making the demand elastic — i.e., price elasticity of demand is greater than 1.