A Short Introduction to Price Elasticity For Demand Functions— Micro Economy

In this article, we will take a quick look at the price elasticity in relation to demand curves. We will specifically consider it with a linear demand function, and see how we can determine the price elasticity.

Defining the Price Elasticity

So, what exactly is the concept of price elasticity? It is simply a measure of the change in consumption of a good in relation to a change in its price. So, a good can then either be elastic or inelastic. A good is said to be inelastic when the absolute elasticity is less than one. This means that changes in price have a small effect on the quantity demanded of the given good. On the other hand, if the absolute elasticity is more than one, then it is elastic — i.e., the changes in price have an effect on the quantity demanded of the given good. Let us take a look at the formula for the price elasticity:

The formula is simply given by the ratio of the percentage change in quantity demanded of a product to the percentage change in price. We can also re-write the price elasticity such that we use the Demand Function:

Finding the Price Elasticity Using the Demand Function

We have now seen the formula for the price elasticity. Let us now imagine that we are given a linear demand function:

We also say that we have X > 0, and y > 0. We can now try to find the price…