If demand is ..............., an increase in the price of the product leads to a decrease in the total expenditure.

Question

Accepted Answer

The correct option is 2:
The question asks about the relationship between a price increase and the resulting decrease in total expenditure (Total Expenditure = Price × Quantity Demanded). This relationship is governed by the price elasticity of demand (PED), which measures the responsiveness of quantity demanded to a change in price. When demand is **elastic** (PED \> 1), consumers are highly sensitive to price changes. Therefore, if the price of a product increases, the resulting percentage decrease in the quantity demanded will be proportionally larger than the percentage increase in price. This substantial drop in quantity demanded outweighs the small gain from the higher price, causing the total expenditure (revenue) received by the sellers, or paid by the consumers, to decrease. This inverse relationship between price and total expenditure is the defining feature of elastic demand.

The incorrect option is 1:
If demand is **Inelastic** (PED \< 1), consumers are relatively unresponsive to price changes. If the price increases, the quantity demanded falls by a smaller percentage, leading to an overall *increase* in total expenditure, which contradicts the condition given in the question.

The incorrect option is 3:
If demand is **Unit Elastic** (PED = 1), a percentage change in price leads to an exactly equal percentage change in quantity demanded in the opposite direction. Consequently, when the price increases, the total expenditure remains *unchanged*.

The incorrect option is 4:
If demand is **Perfectly Inelastic** (PED = 0), the quantity demanded does not change at all, regardless of the price. In this case, an increase in price would lead to a direct, proportional *increase* in total expenditure, as the quantity component remains constant.