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Using Calculus To Calculate Price Elasticity of Demand

Calculus Price Elasticity

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Suppose you're given the following question:

Demand is Q = 110 - 4P. What is price (point) elasticity at $5?

We saw that we can calculate any elasticity by the formula:

    Elasticity of Z with respect to Y = (dZ / dY)*(Y/Z)
In the case of price elasticity of demand, we are interested in the elasticity of quantity demand with respect to price. Thus we can use the following equation:
    Price elasticity of demand: = (dQ / dP)*(P/Q)
In order to use this equation, we must have quantity alone on the left-hand side, and the right-hand side be some function of price. That is the case in our demand equation of Q = 110 - 4P. Thus we differentiate with respect to P and get:
    dQ/dP = -4
So we substitute dQ/dP = -4 and Q = 110 - 4P into our price elasticity of demand equation:
    Price elasticity of demand: = (dQ / dP)*(P/Q)
    Price elasticity of demand: = (-4)*(P/(110-4P)
    Price elasticity of demand: = -4P/(110-4P)
We're interested in finding what the price elasticity is at P = 5, so we substitute this into our price elasticity of demand equation:
    Price elasticity of demand: = -4P/(110-4P)
    Price elasticity of demand: = -20/90
    Price elasticity of demand: = -2/9
Thus our price elasticity of demand is -2/9. Since it is less than 1 in absolute terms, we say that Demand is Price Inelastic

Next: Using Calculus To Calculate Income Elasticity of Demand.

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