Elasticity of Demand
Given a demand function that gives q in terms of p,
The elasticity of demand is
E=∣qp×dpdq∣
(Note that since demand is a decreasing function of p, the derivative is negative. That’s why we have the absolute values—so E will always be positive.)
- If E < 1, we say demand is inelastic. In this case, raising prices increases revenue.
- If E > 1, we say demand is elastic. In this case, raising prices decreases revenue.
- If E = 1, we say demand is unitary. E = 1 at critical points of the revenue function.