If due to fall in price, total expenditure on the commodity falls, it indicates?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → price elasticity of demand is less than unity.
Price elasticity of demand for a good is defined as the percentage change in demand for the good divided by the percentage change in its price.
Total Expenditure = P * Q
If price falls and total expenditure also falls, it means that the percentage increase in quantity demanded is less than the percentage decrease in price. This indicates that demand is inelastic, i.e., price elasticity of demand < 1 (less than unity).
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PED > 1 (elastic demand) → Price ↓ ⇒ Total Expenditure ↑
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PED = 1 (unitary elastic) → Price ↓ ⇒ Total Expenditure remains constant
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PED < 1 (inelastic demand) → Price ↓ ⇒ Total Expenditure ↓