Question

Given below are two statements, one is labelled as Assertion (A) and other one labelled as Reason (R).
Assertion (A): The total expenditure made by a consumer on a normal goods decreases with the increase in its price.
Reason (R): The price elasticity of demand for the goods is elastic ($\varepsilon_d > 1$).
In light of the above statements, choose the most appropriate answer from the options given below.

• A. Both (A) and (R) are correct and (R) is the correct explanation of (A).
• B. Both (A) and (R) are correct but (R) is NOT the correct explanation of (A).
• C. (A) is correct but (R) is not correct.
• D. (A) is not correct but (R) is correct.

Hint:

Remember this relationship for Price ($P$) and Total Expenditure ($TE$):
- Elastic ($\varepsilon_d > 1$): $P \uparrow \implies TE \downarrow$ (Opposite direction)
- Inelastic ($\varepsilon_d < 1$): $P \uparrow \implies TE \uparrow$ (Same direction)
- Unitary ($\varepsilon_d = 1$): $TE$ remains unchanged.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
The Total Expenditure Method, introduced by Alfred Marshall, determines the price elasticity of demand by analyzing how total spending changes in response to a change in price.
Total Expenditure ($TE$) is calculated as:
\[ TE = P \times Q \] where $P$ is the price and $Q$ is the quantity demanded.

Step 2: Detailed Explanation:
Let us analyze the relationship between price changes and total expenditure under different elasticities:
1. If demand is elastic ($\varepsilon_d > 1$), the percentage change in quantity demanded is greater than the percentage change in price.
When price increases, quantity demanded decreases by a larger percentage.
Consequently, the product of price and quantity ($TE$) decreases.
Conversely, if price decreases, quantity demanded increases by a larger percentage, causing $TE$ to increase.
Therefore, price and total expenditure move in opposite directions when demand is elastic.
2. If demand is inelastic ($\varepsilon_d < 1$), price and total expenditure move in the same direction.
3. If demand is unitary elastic ($\varepsilon_d = 1$), total expenditure remains constant.
Let us evaluate Assertion (A):
"The total expenditure made by a consumer on normal goods decreases with the increase in its price."
This states that price and total expenditure move in opposite directions. This is true if and only if the demand for the good is elastic ($\varepsilon_d > 1$).
Let us evaluate Reason (R):
"The price elasticity of demand for the goods is elastic ($\varepsilon_d > 1$)."
Reason (R) is true and is the exact cause for the phenomenon described in Assertion (A).
Thus, both statements are correct and (R) is the correct explanation of (A).

Step 3: Final Answer:
The correct option is (A).