Elasticity

The price elasticity of demand is the responsiveness of quantity to price:

Demand is elastic when $|E| > 1$ (consumers cut quantity proportionally more than price rises — $MR > 0$), unit elastic at $|E| = 1$ (revenue invariant — $MR = 0$), and inelastic when $|E| < 1$ ($MR < 0$, so cutting price reduces revenue). At every point on the demand curve,

type: elasticity-mr

When to use

Elasticity is the link between demand shape and pricing power. A monopolist never operates on the inelastic portion of demand, because $MR < 0$ there means cutting price reduces revenue while $MC \geq 0$; $MR = MC$ always lands on the elastic portion. The Lerner Index formula $L = 1/|E|$ uses elasticity directly. In Third-Degree Price Discrimination the segment with less elastic demand pays the higher price — the rule of thumb behind student discounts, off-peak pricing, and geographic price differences.