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Managerial Economics by Donald N. Stengel

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Elasticity of Demand

Another use of a mathematical demand function is measuring how sensitive demand is to changes in the level of one of the determinants. Suppose we would like to assess whether the demand for broadband service will change much in response to a change in its price. One indicator of the level of response to a price change is the coefficient of the price term in the demand function equation, –800 P. The interpretation of the coefficient –800 is that for each increase of $1 in the monthly subscriber price, the number of monthly subscribers will decrease by 800 subscribers.

This observation provides some insight, particularly if the broadband firm is considering a price change and would like to know the impact on the number of subscribers. ...

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