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Total expenditure is an economic term used to describe the total amount of money that is spent on a product in a given time period. This amount is achieved by multiplying the quantity of the product purchased by the price at which it was purchased. The way that total expenditure changes over time is dependent upon price changes in that time period. How much the price change affects the expenditure amount is closely related to how elastic the demand for the product might be.
Economists are constantly looking for ways to measure the relationship between price levels of a certain product and the corresponding behavior of consumers toward that product. It is not as simple as lowering the price of a product to create more purchases of that product. Demand levels also are an important factor in determining at what price level the greatest response to the product will occur. The total expenditure spent on a given product is always tied into the price and demand levels.
To calculate the total expenditure of a certain product at a given time, the quantity of the product sold and the price for which it was sold first need to be known. For example, imagine that a company sells cars and decides upon a price of $20,000 US Dollars (USD) for a single car. In a given amount of time, the company sells 200 cars at that price. Using this case, the expenditure total would be 20 multiplied by $20,000 USD, which comes to $400,000 USD.
Of course, the amount of cars sold was not only determined by the price level at that specific time. It is important when considering total expenditure to also consider the amount of demand for that car or any other product and how that affects the amount sold. Economists take a close look at the elasticity of demand when considering expenditure. Elasticity of demand is a measurement of how flexible the demand level might be for a certain product.
In the case of total expenditure, there are three possible results that can occur from differing levels of demand elasticity. If the demand for a product is relatively elastic, the expenditure levels will move in the opposite direction of any price movement. At relatively inelastic levels, the expenditure should move in the same direction as any price changes. Finally, when the demand is at a baseline level known as unit elastic, any change in price will have no effect whatsoever on the amount of expenditure for the product.
@NathanG - Okay, then, let’s apply the principle of total expenditure and elasticity of demand to taxes, and the current federal debt.
The government wants to tackle the federal debt by increasing taxes. Will total revenue increase or decrease? That is the core of the big tax debate.
I argue that people’s desire to pay more taxes is fairly elastic. In other words, they’re willing to scale back some of their income producing activities if taxes increase.
No, they won’t quit their jobs, but they may scale back a part time business for example, or find other ways to reduce their taxable income.
Many government officials seem to have an inelastic view of consumer – and small business – activity. Raise taxes, they say, and people will keep on giving.
I don’t believe that myself, and frankly I haven’t seen an example anywhere that tells me otherwise.
I like the article’s presentation. Total expenditure is actually a simple concept to understand, but it’s the principle of demand elasticity that puts a wrinkle in things, and affects how much people will actually spend on a product.
Personally, I would put things like total energy expenditure in the column of inelastic demand. In other words, you’ve got to have gas for your car. You can buy a more fuel efficient car if you want, but most cars still run on gas. Therefore if gas prices increase, you’re still buying.
On the other hand, recreational consumables I would think would fall in the column of elastic demand. When times are tough, you can cut back on going to the movies and eating out and buying flat panel TVs. Here I don’t think raising prices will cause an increase in total expenditure; rather, you’d see a decrease.