The expenditure elasticity is a measurement of how expenditure on a good changes in response to a price change. The formula for the expenditure elasticity is defined:

where and is the price and quantity of good in period 1 and and is the price and quantity in period 0.

The expenditure elasticity is different to the usual measures of elasticity in that it measures how expenditure changes in response to a price change instead of how the quantity of a good changes in response to a price change. 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.

* Usually