Question

Consider a free, open and competitive market where the market demand and market supply lines determine the equilibrium price and quantity of the product bought and sold.

Now, due to new and improved technology the firms use to produce the product, the market supply of the product has increased and as a result there is a new equilibrium price and quantity bought and sold.

Explain what will happen to the total expenditure of the consumers (increase, decrease, remain the same) when they buy the new quantity at the new equilibrium price, if (a) the demand for the product is elastic, (b) inelastic, or (c) unit elasticity.

- If the demand is elastic, then the total expenditure will ?

- If the demand is inelastic, then the total expenditure will ?

- If the demand is unit elasticity, then the total expenditure will ?

Answer 1

When demand is elastic then improvement in technology will increase the equilibrium quantity and lowers the equilibrium price and total expenditure will increase because here quantity effect is greater than price effect and quantity effect increases revenue whereas price effect decreases.

when demand is inelastic then total expenditure will fall because demand is inelastic and quantity effect is less than price effect

when demand is unitary elastic then total expenditure will remain same because quantity effect will be same as price effect