Elasticity of Demand

Business Calculus · Axiom Academy

How sensitive are customers to price changes? You're a business manager deciding whether to raise prices. The big question: Barely notice and keep buying? (You'd make more money!) Flee to competitors? (You'd lose money!) Elasticity of demand measures how much quantity demanded changes when price changes. It's the key to smart pricing. You need to get to work regardless of price. Even if gas prices rise 20%, you might only reduce driving by 5%. Inelastic - people keep buying If restaurant prices rise 20%, you might cook at home 30% more often. It's easy to substitute. Elastic - demand drops significantly If q = D(p) is the demand function (quantity as a function of price), then: Interpretation: E(p) tells you the percentage change in quantity demanded for each 1% change in price. Interactive: Elasticity Simulator Elasticity and Revenue Maximization Revenue is maximized when elasticity equals 1 (unit elastic). If |E| < 1 (inelastic): Raising price increases revenue - do it! If |E| > 1 (elastic): Lowering price increases revenue - do it! If |E| = 1: You're at the sweet spot - revenue is maximized

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