We will use the same example of Thabo's smoking habits to illustrate, with the aid of diagrams, what happens to total spending if the price of a good or service with an inelastic demand changes.
You are given the following information:
- Thabo smokes 10 packets of cigarettes a week.
- The price of a packet of cigarettes is R30.
- His price elasticity is estimated at 0,5.
Thabo's total spending
|P||Qd||Total spending per week (TS)|
|Weekly spending at R30 per packet||R30||10||R300|
|Weekly spending at R33 per packet||R33||9.5||R313,50|
Next, we show graphically what happens to Thabo's total spending if the price of cigarettes increases by 10%. The calculations we use are the same as those in our previous example, and are summarised in the above table:
From this, we can conclude that if demand is inelastic, like in the case of cigarettes, an increase in the price leads to an increase in total spending.
In the above explanation, we compared Thabo's total spending before and after the increase in price, and then reached the conclusion that if demand is inelastic, an increase in price increases total spending.