Comment upon the degree of elasticity of demand for Good X, in the following given situations, if the price of the commodity rises from 5 per unit to 7 per unit and the quantity demanded falls from 20 units to 16 units:

i) Using the total household expenditure method

ii) Using proportionate method

Total expenditure = Price*Quantity

Expenditure (P=5, Q=20) = 5*20 = 100

Expenditure (P=7, Q=16) = 7*16 = 112

When the price of the commodity rises from Rs 5 to Rs 7, the total expenditure also rises from Rs 100 to Rs 112. Thus, the demand is inelastic in nature. If a decline in price results in a decline in total expenditure and an increased price in an increase in total expenditure, the demand is inelastic with the elasticity of less than 1 (Ed<1). The demand curve will be a steep downward sloping curve.

ii)

Price elasticity = Percentage change in Qd/Percentage change in P

= (rQd/rP)*(P/Qd)

= (4/2)*(5/20) = 0.5

The price elasticity of demand for the commodity is 0.5. The demand is inelastic in nature. When the change in price results in a less than proportionate change in the quantity demanded, the demand is considered inelastic. The elasticity coefficient of inelastic demand will be less than 1 (Ed<1). The demand curve will be a steep downward sloping curve.