4.2 Price, quantity demanded & total expenditure

• The demand curve shows how much people want to buy a product at different prices.
• • Total spending (or revenue) = price × quantity demanded.
• When the price is lowered, two things happen:

  1. Price Effect: Each unit of the product is now cheaper, which decreases total spending.
  2. Quantity Effect: Because the price is lower, more people will buy the product, which increases total spending.
• Case A (Elastic Demand):

  • Demand is very responsive to price changes.
  • When price drops, the quantity demanded increases a lot.
  • This big increase in quantity makes up for the lower price, so total spending increases.
• Case B (Inelastic Demand):

  • Demand is not very responsive to price changes.
  • When price drops, the quantity demanded only increases a little.
  • This small increase in quantity doesn’t make up for the lower price, so total spending decreases.
• Case C (Unit Elastic Demand):

  • The percentage change in price equals the percentage change in quantity demanded.
  • This means the increase in quantity exactly cancels out the price cut, so total spending stays the same.
• If demand is elastic lowering prices increases total spending.
• If demand is inelastic lowering prices decreases total spending.
• If demand is unit elastic lowering prices doesn’t change total spending.
• total spending = revenue
• Elastic demand (e.g., -3):

  • Price rise → Total spending falls because the drop in quantity demanded is more than the rise in price.
  • Price cut → Total spending rises because the increase in quantity demanded is larger than the fall in price.
• Unit-elastic demand (e.g., -1):

  • Price rise or cut → Total spending remains unchanged because the change in price is exactly offset by the change in quantity demanded.
• Inelastic demand (e.g., -0.3):

  • Price rise → Total spending rises because the decrease in quantity demanded is smaller than the price increase.
  • Price cut → Total spending falls because the increase in quantity demanded is smaller than the price drop.
• Total spending (or revenue) is highest when demand is unit-elastic, meaning the price cut and quantity increase are perfectly balanced.