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What is total expenditure?
What’s important to know about it?
In this article, I will break down the meaning of Total Expenditure so you know all there is to know about it!
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Let me explain to you what total expenditure is and why it matters!
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What Is Total Expenditure
In economics, total expenditure refers to the total amount that is spent purchasing goods and services in a specified period of time.
To determine the total expenditure, you take the total number of units of a product sold or services rendered and you multiply that by its sales price.
In other words, the notion of total expenditure provides a measure of how much in total was spent purchasing goods and services.
Depending on how much it costs to purchase goods and services, economic players will adjust their spending.
The change in total expenditure resulting from a change in price is referred to as price elasticity.
If prices go up or down, the total expenditures will change.
Why Total Expenditure Is Important
Calculating the total expenditure in the economy is an important indication of how well the economy is doing.
The more people spend purchasing goods, the more the economy will grow.
Understanding how economic policies, inflation, prices, and other factors affect total expenditures allows policymakers and economists to make better economic decisions at any given time.
Also, understanding the relationship between price and total expenditures is key for businesses.
Depending on the type of product or service, a reduction or increase in price may affect demand differently.
For example, a reduction in price for luxury goods may potentially lead to fewer sales as the price no longer conveys the sentiment that the product is “premium”.
On the other hand, for many products, a reduction in price will lead to an increase in sales as customers are highly price sensitive.
How To Calculate Total Expenditure
You can calculate total expenditures by taking the total number of units sold multiplied by the sales price.
The total expenditure formula can be presented as follows:
Total Expenditure = Total Units Sold X Sales Price
The objective is to see how much money was generated (or spent by consumers) in purchasing goods and services.
The more a company is able to sell units, the more it can potentially generate higher revenue.
The more a company can sell each unit at a higher price, the more it can increase its revenues.
Depending on the price a company sets for its products and services, the total number of units will change.
For every product, there is a price range where the company can generate the most sales and, thus, achieve the highest level of total expenditure.
Price Elasticity Impact On Total Expenditure
Depending on the price elasticity of a product, the total expenditures can vary when prices change.
Price elasticity can have three possible impacts on total expenditure: total expenditure moves in the same direction as price, total expenditure moves in the opposite direction as price, or there is no change in total expenditure with changes in the unit price.
When the total expenditure goes up and the price goes down, the product is considered to be elastic.
It means that any change in price will lead to an opposite impact on the total expenditure.
Increasing prices will result in lower total expenditure, and vice versa.
When the price and total expenditure go in the same direction, we say that the product is inelastic.
This means that an increase in price will lead to an increase in total expenditure, and vice versa.
Finally, when the change in price does not affect the total expenditure in any way, we say that the demand is at a baseline level.
Total Expenditure Example
Let’s look at an example of total expenditure to better understand the concept.
Imagine that a company sells certain goods.
When selling its product at $50 per unit, it is able to sell 100,000 units.
When selling at $40 per unit, it is able to sell 200,000 units.
When dropping the price to $30 per unit, it is able to sell 225,000 units.
In this case, at $50 per unit, the total expenditure is $5,000,000 ($50 X 100,000).
At $40 per unit, total expenditure is $8,000,000.
At $30 per unit, total expenditure is $6,750,000.
As you can see, the total expenditure changes as the company changes its price point.
For this product, total expenditure appears to be the highest at about $40 per unit.
A reduction in price from $40 leads to a drop in total expenditures and an increase in price leads to a greater drop.
This notion of demand changing as a function of price is called demand elasticity.
So there you have it folks!
What does “total expenditure” mean?
In a nutshell, total expenditure represents the sum of the price paid for a product or service multiplied by the number of units sold.
In economics, the notion of total expenditure is closely linked to price elasticity for a product.
A product is said to be elastic when a change in price affects the total price in the opposite direction.
A product is inelastic when a change in price will affect total expenditure in the same direction.
Finally, a product is at a baseline level when changes in price do not affect total expenditures.
Understanding total expenditures allow companies and business managers to make better decisions about the number of units to produce and determine the optimal sales price.
Now that you know what total expenditure means and how it works, good luck with your research!
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