What is the elasticity of demand? Explain the expenditure method to measure the elasticity of demand.

Elasticity of demand represents that level of responsiveness of amount demanded of a commodity to alterations in a single variable on which that demand depends. It is that percentage alteration in amount demanded which is divided by percentage in that variable on which the demand depends. It tends to be closely related to the expenditure on a certain good.

The total expenditure technique to assess the elasticity of demand involves measurement by consideration of the alteration in price and the resulting alteration in the total amount of goods bought as well as the total quantity of money expended on it. The common equation is -
Total Outlay/Price = Quantity Demanded

Three possibilities are involved in this method:

(A) The resultant elasticity of demand tends to be higher than one if the demand enhances with drop in price and the complete expenditure enhances, or if the demand falls with rise in price and the complete expenditure also drops.

(B) If the demand enhances or falls with a drop or rise in price, respectively, and the complete expenditure is found to be the same, it leads to a unitary elasticity of demand or one.

(C) The resultant elasticity of demand tends to be less elastic or lesser than one if the demand enhances with a fall in price and the complete expenditure also falls, or if the demand falls with an increase in price and the complete expenditure also increases.