🧃intermediate microeconomic theory review

key term - Unit elastic demand

Definition

Unit elastic demand refers to a situation where the quantity demanded of a good or service changes by exactly the same percentage as the change in its price, resulting in an elasticity coefficient of exactly one. This concept helps in understanding how consumers respond to price changes, indicating that total revenue remains constant when prices change since the percentage change in quantity demanded offsets the percentage change in price.

5 Must Know Facts For Your Next Test

  1. Unit elastic demand means that if the price increases by 10%, the quantity demanded also decreases by 10%.
  2. This type of demand is represented graphically as a downward-sloping linear demand curve where any point on the curve has a price elasticity of demand equal to one.
  3. In the case of unit elastic demand, changes in price do not affect total revenue; it remains unchanged regardless of whether the price increases or decreases.
  4. Unit elastic demand is typically found at a specific point on a linear demand curve, particularly at its midpoint.
  5. Understanding unit elastic demand helps businesses make informed pricing decisions and predict consumer behavior more accurately.

Review Questions

  • How does unit elastic demand affect total revenue when there is a price change?
    • When there is unit elastic demand, a change in price does not affect total revenue. This is because the percentage decrease in quantity demanded matches exactly with the percentage increase in price. For example, if the price goes up by 10%, quantity demanded falls by 10%, leaving total revenue unchanged. This characteristic makes unit elastic demand unique compared to elastic and inelastic demands.
  • Compare and contrast unit elastic demand with elastic and inelastic demand in terms of consumer behavior and revenue implications.
    • Unit elastic demand stands apart from elastic and inelastic demands based on how consumers react to price changes. In elastic demand, consumers significantly reduce their purchases as prices rise, leading to lower total revenue. Conversely, with inelastic demand, consumers continue to buy relatively unchanged quantities despite price increases, which can raise total revenue. Unit elastic demand maintains constant total revenue as both price and quantity demanded change proportionately, making it crucial for pricing strategies.
  • Evaluate how understanding unit elastic demand can help businesses in setting pricing strategies within competitive markets.
    • Grasping the concept of unit elastic demand is vital for businesses as it guides effective pricing strategies in competitive markets. By knowing that total revenue remains constant at unit elasticity, firms can make strategic decisions about pricing adjustments without risking significant losses or gains. Understanding where their product's demand falls on the elasticity spectrum allows businesses to set optimal prices that balance sales volume and revenue generation while remaining responsive to competitor pricing and consumer preferences.