The expenditure elasticity measures the responsiveness of spending on a commodity to a change in price. The expenditure elasticity formula is defined

where $P_1$ and $X_1$ is the price and quantity of good X in period 1 and $P_0$ and $X_0$ is the price and quantity in period 0. In essence, the expenditure elasticity measures how much consumers increase or decrease their spending after a price increase.

If the expenditure elasticity is **positive,** the total expenditure on good X **increases** after a price increase.

If the expenditure elasticity is **negative, **the total expenditure on good Y **decreases** after a price increase.

Consider the following hypothetical sales data presented in the table below

Price | Quantity | Expenditure |

$2 | 8 | $16 |

$4 | 6 | $24 |

$6 | 4 | $24 |

$8 | 2 | $16 |

We can calculate the expenditure elasticity when the price increases from $2 to $4 as follows:

The expenditure elasticity is larger than zero, which is confirmed by the fact that expenditure clearly rose when the price increased from $2 to $4.

We can also calculate the expenditure elasticity when the price increases from $4 to $6, as follows:

Since the expenditure did not change, the expenditure elasticity is 0.

Finally, if the price increases from $6 to $8 we can calculate the expenditure elasticity as

In this case, the expenditure elasticity is negative since expenditure decreased when the price increased.

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