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Total Expenditure Method

4.4 Total Expenditure Method — Understand how price elasticity relates to total expenditure: elastic demand (Ed>1), inelastic demand (Ed<1), and unitary elastic (Ed=1). CBSE Class 11 Microeconomics notes with examples.

Notes

Total Expenditure Method

Chapter 4: Elasticity of Demand — Price, Expenditure, and Elasticity Relationship

Relationship Overview — Three Cases

Click each card to see how total expenditure changes with price for each elasticity type.

Samosa Stall Test:A samosa seller sells 100 samosas at ₹10 each (TE = ₹1,000). She raises the price to ₹12 — if she sells 90 samosas (TE = ₹1,080), TE went up with price → Eₔ < 1. If she sells 70 samosas (TE = ₹840), TE went down → Eₔ > 1. If she sells 83 samosas (TE ≈ ₹996 ≈ unchanged), Eₔ ≈ 1. The seller doesn't need formulas — she can just check whether her total revenue went up, down, or stayed the same after the price change.

Total Expenditure Method — Formal Definition

What Is the Total Expenditure Method?Price Elasticity of Demand can also be calculated by the Total Expenditure Method. This method was suggested by Prof. Marshall. It is also known as “Total Outlay Method” or “Total Revenue Method”. Under this method, price elasticity is measured by comparing Total Expenditure (TE) on the commodity before and after the change in price.

Key Takeaways

  • Eₔ > 1, if TE is inversely related to the price — when price falls, TE rises; when price rises, TE falls.
  • Eₔ < 1, if TE is directly related to the price — when price falls, TE falls; when price rises, TE rises.
  • Eₔ = 1, if TE does not change with change in price — TE remains constant regardless of price movement.

Limitation of the Total Expenditure Method

Limitation of Total Expenditure MethodTotal Expenditure method suffers from one defect. It fails to give the exact magnitude of elasticity. By this method, we can only know whether the elasticity is equal to one, greater than one or less than one. Hence, this method is restrictive and provides only a rough measure of elasticity.

Why this matters

Think of it like a weighing scale that only tells you “heavier,” “lighter,” or “same weight” but never gives you the exact number. The Total Expenditure Method tells you the direction of elasticity (more than 1, less than 1, or equal to 1) but not the precise value. For the exact number, you need the Percentage Method or Proportionate Method instead.