Elasticity, Total Revenue, and the Linear Demand Curve
Elasticity measures the degree to which the quantity demanded responds to a change in price. When the elasticity of demand is greater than one (represented above by the purple regions), demand is considered elastic and lowering the price leads to an increase in revenue. When the elasticity is less than one (represented above by the blue regions), demand is considered inelastic and lowering the price leads to a decrease in revenue. Revenue is maximized when the elasticity is equal to one.
Elasticity of demand is given by where represents the price, represents the quantity demanded, and represents a change.