crams

💸principles of economics review

key term - Unit Elastic

Citation:

Definition

Unit elastic refers to a situation where the percentage change in quantity demanded is exactly equal to the percentage change in price. In other words, the elasticity of demand is equal to 1, indicating that the demand is neither elastic nor inelastic, but rather perfectly responsive to changes in price.

5 Must Know Facts For Your Next Test

  1. Unit elastic demand means that a 1% change in price leads to a 1% change in quantity demanded in the opposite direction.
  2. When demand is unit elastic, total revenue (price x quantity) remains constant regardless of changes in price.
  3. Unit elastic demand is a special case of constant elasticity, where the elasticity coefficient is exactly 1.
  4. Unit elastic demand is the midpoint between perfectly elastic and perfectly inelastic demand on the elasticity spectrum.
  5. The unit elastic case is important in understanding the relationship between price, quantity, and total revenue.

Review Questions

  • Explain how unit elastic demand differs from other polar cases of elasticity, such as perfectly elastic and perfectly inelastic demand.
    • Unit elastic demand is the midpoint between the two polar cases of elasticity. Unlike perfectly elastic demand, where a small change in price leads to an infinite change in quantity, or perfectly inelastic demand, where quantity is unresponsive to price changes, unit elastic demand exhibits a 1-to-1 relationship between percentage changes in price and quantity. This means that a 1% change in price leads to a 1% change in quantity in the opposite direction, resulting in total revenue remaining constant regardless of the price level.
  • Describe the relationship between unit elastic demand and constant elasticity, and explain how this concept is important in understanding the behavior of total revenue.
    • Unit elastic demand is a special case of constant elasticity, where the elasticity coefficient is exactly 1. In a constant elasticity scenario, the elasticity of demand remains the same regardless of the price or quantity level, resulting in a linear demand curve on a log-log graph. The unit elastic case is particularly important because it represents the point where changes in price and quantity exactly offset each other, leaving total revenue (price x quantity) unchanged. This means that producers cannot increase their total revenue by adjusting the price, as the increase in quantity demanded exactly compensates for the decrease in price, and vice versa.
  • Analyze the implications of unit elastic demand for producers and consumers, and explain how this concept can be used to inform pricing strategies and decision-making.
    • The unit elastic case has important implications for both producers and consumers. For producers, unit elastic demand means that changes in price do not affect total revenue, as the increase in quantity demanded exactly offsets the decrease in price. This limits the ability of producers to increase their profits through price adjustments alone. However, it also suggests that producers should aim to operate at the unit elastic point, as any deviation from this point would result in a decrease in total revenue. For consumers, unit elastic demand means that their total expenditure on a good remains constant, regardless of the price level. This can be beneficial for consumers, as it allows them to maintain a consistent level of consumption without experiencing significant changes in their overall spending. Understanding unit elastic demand can help producers and consumers make more informed decisions about pricing, production, and consumption patterns.