The ratio of percentage change in demand and the percentage change in price is called elasticity of demand. Thus,
Elasticity of demand = \(− \frac{Percentage \,change\, in \,demand }{ Percentage \,change \,in \,price }\)
- The demand of an item x is a function of the price of an item p, i.e., x = f(p).
- The relation between demand of an item and its price is inverse. Hence, the negative sign is taken in the formula of elasticity of demand.
- Demand x is a function of price p. Hence, taking the derivative of x with respect to p the elasticity of demand is obtained as follows: Elasticity of demand = −\(\frac{p}x⋅\frac{dx}{dp}\)