Because price and quantity change in opposite directions along a demand curve, changes in total expenditure depend on the relative changes in price and quantity. If price changes relatively less than quantity (elastic demand), then total expenditure changes in the opposite direction of price. If price changes relatively more than quantity (inelastic demand), then total expenditure changes in the same direction of price.

Five Elasticity Alternatives

Digital Distance Demand

• The point of intersection between the demand curve and the vertical price axis is perfectly elastic (E=∞).


• The segment between the midpoint and the price-axis intercept is relatively elastic (1 < E < ∞).


• The exact middle, or midpoint, of the demand curve is unit elastic (E=1).


• The segment between the midpoint and the quantity-axis intercept is relatively inelastic (0 < E < 1).


• The intersection point between the demand curve and the horizontal quantity axis is perfectly inelastic (E=0).

Calculating Total Expenditure

• For example, if the price is 18 cents per minute and the corresponding quantity demanded is 1 million minutes, then total expenditure on Digital Distance telephone services is $180,000 (= $0.18 x 1,000,000).


• Alternatively,if the price is 10 cents per minute and the corresponding quantity demanded is 5 million minutes, then total expenditure is $500,000 (= $0.10 x 5,000,000).


• Or, if the price is 2 cents per minute and the corresponding quantity demanded is 9 million minutes, then total expenditure on Digital Distance telephone services is also $180,000 (= $0.02 x 9,000,000).

Total Expenditure and Demand

Making the Connection

The bottom panel can be used to present the total expenditure curve derived from the demand curve. Total expenditure is found by multiplying the quantity by the corresponding price found on the demand curve. A quantity of 2 million minutes is associated with a price of 18 cents, giving a total expenditure of $180,000. A quantity of 5 million minutes is associated with a price of 10 cents and the total expenditure is $500,000. A quantity of 9 million minutes is associated with a price of 2 cents, also giving a total expenditure of $180,000. Other points on the total expenditure curve are identified in a like manner. Click the [Total Expenditure] button to reveal the curve plotted for each quantity.

The result is an inverted-U shaped total expenditure curve. When quantity is zero, total expenditure is also zero, as the curve starts from the origin. As the quantity increases from 0 to 5 million minutes, total expenditure also rises. The curve peaks at 5 million minutes with a total expenditure of $500,000. The curve then declines until it reaches zero once again at a quantity of 10 million minutes.

The shape of this curve is connected to the price elasticity of demand along the demand curve. Along the relatively elastic range of the demand curve, for prices between 20 and 10 cents per minute, lower prices induce greater total expenditure. Along the relatively inelastic range of the demand curve, for prices between 10 and 0 cents per minute, lower prices induce lower total expenditure. And the peak of the total expenditure curve, when total expenditure is neither rising nor falling, the demand curve is unit elastic. Click the [Five Alternatives] button to highlight this connection.

What Does This Mean?

Because total expenditure is calculated as price times quantity, any change in total expenditure results from changes in both price and quantity. As such, when a decrease in price causes the quantity to increase, then forces are working on total expenditure from both sides. The lower price works to decrease total expenditure and the larger quantity works to increase total expenditure. Which one wins? It depends on which change is greater.

• For elastic demand, the percentage change in price is less than the percentage change in quantity. Quantity wins this battle. The reduction in total expenditure induced by the lower price is overwhelmed by the increase in total expenditure induced by the larger quantity, thus total expenditure increases with a price decrease.


• For inelastic demand, the percentage change in price is greater than the percentage change in quantity. Price wins this battle. The increase in total expenditure induced by the larger quantity is overwhelmed by the decrease in total expenditure induced by the lower price, thus total expenditure decreases with a price decrease.