Elasticity of Demand
E( p) = –
relative rate of change of demand
relative rate of change of price
E( p) =
– p f ʹ′( p)
f ( p)
Interpretations:
Condition
If E(p) > 1
If 0 < E(p) < 1
If E(p) = 1
Name
"demand is elastic"
- a small change in price
causes a larger change in
demand
Result
Rʹ′( p) < 0
- slightly increasing the
price causes a decrease in
revenue
"demand is inelastic"
- a small change in price
causes an even smaller
change in demand
Rʹ′( p) > 0
- slightly increasing the
price causes an increase in
revenue
"unit elasticity"
- a small change in price
causes the same change in
demand
Rʹ′( p) = 0
- slightly increasing the
price causes no change in
revenue