💲honors economics review

Unit Elastic Demand/Supply

Written by the Fiveable Content Team • Last updated September 2025

Definition

Unit elastic demand/supply refers to a situation where the quantity demanded or supplied changes by exactly the same percentage as the change in price, resulting in an elasticity coefficient of one. This means that a 1% increase in price leads to a 1% decrease in quantity demanded for demand or a 1% increase in quantity supplied for supply. In this case, total revenue remains constant as price changes, highlighting a unique balance between consumers and producers.

5 Must Know Facts For Your Next Test

When demand or supply is unit elastic, total revenue does not change with price fluctuations, meaning firms can adjust prices without affecting overall sales revenue.
The concept of unit elasticity helps businesses determine optimal pricing strategies in order to maximize their revenue.
Unit elastic demand/supply can be found in markets where consumers are responsive to price changes but still maintain stable purchasing patterns.
Mathematically, unit elasticity is expressed as the absolute value of the price elasticity of demand or supply being equal to 1.
Understanding unit elastic demand/supply is crucial for policymakers when assessing the impact of taxes or subsidies on markets.

Review Questions

How does unit elastic demand/supply differ from elastic and inelastic demand/supply?
- Unit elastic demand/supply differs from elastic and inelastic situations primarily in how quantity responds to price changes. In unit elastic cases, a specific percentage change in price results in an equal percentage change in quantity, maintaining total revenue. In contrast, elastic demand/supply sees larger changes in quantity compared to price changes, while inelastic cases see smaller changes. This understanding is key for businesses to strategize pricing effectively.
Discuss the implications of unit elastic demand/supply for businesses trying to maximize total revenue.
- For businesses aiming to maximize total revenue, understanding unit elastic demand/supply is vital because it allows them to adjust prices without worrying about losing revenue. When facing unit elasticity, if prices rise, quantities will fall proportionately, keeping total revenue stable. This insight helps firms strategize effectively during pricing decisions, especially when entering competitive markets or responding to economic shifts.
Evaluate how knowledge of unit elastic demand/supply can influence government policy regarding taxation and subsidies.
- Knowledge of unit elastic demand/supply can significantly influence government policy on taxation and subsidies. If policymakers understand that certain goods have unit elastic characteristics, they can predict that tax increases will not significantly reduce overall sales revenue. This insight allows for better decision-making regarding tax rates and subsidy allocations, as it helps ensure that intended benefits are achieved without unintended consequences on market equilibrium or consumer behavior.