💸principles of economics review

key term - Unit Elastic Demand

Definition

Unit elastic demand refers to a situation where the percentage change in quantity demanded is equal to the percentage change in price. In other words, when the price of a good changes, the quantity demanded changes proportionally, resulting in a unitary price elasticity of demand.

5 Must Know Facts For Your Next Test

  1. Unit elastic demand is a special case of price elasticity of demand, where the value is exactly 1.
  2. When demand is unit elastic, a 1% increase in price will lead to a 1% decrease in quantity demanded, and vice versa.
  3. Unit elastic demand is often observed for goods that have close substitutes and where consumers are highly responsive to price changes.
  4. The revenue generated by a firm will remain constant when demand is unit elastic, as the percentage increase in price is exactly offset by the percentage decrease in quantity demanded.
  5. Understanding unit elastic demand is crucial in pricing strategies, as it helps firms determine the optimal price to maximize revenue.

Review Questions

  • Explain how unit elastic demand is related to the concept of price elasticity of demand.
    • Unit elastic demand is a specific case within the broader concept of price elasticity of demand. Price elasticity of demand measures the responsiveness of quantity demanded to changes in price, with a value of 1 indicating unit elastic demand. When demand is unit elastic, a 1% change in price leads to a 1% change in quantity demanded in the opposite direction, meaning the percentage change in quantity is proportional to the percentage change in price.
  • Describe the impact of unit elastic demand on a firm's revenue.
    • When demand is unit elastic, a change in price will not affect the total revenue generated by a firm. This is because the percentage increase in price is exactly offset by the percentage decrease in quantity demanded, or vice versa. As a result, the total revenue remains constant, regardless of the price charged. This information is crucial for firms when determining pricing strategies to maximize revenue, as they can adjust prices without affecting their overall earnings.
  • Analyze the factors that contribute to the prevalence of unit elastic demand in certain markets.
    • Unit elastic demand is often observed in markets where consumers have access to close substitutes for a good and are highly responsive to price changes. In these scenarios, a change in price will lead to a proportional change in quantity demanded, as consumers can easily switch to alternative products. Additionally, the availability of information and the level of competition in the market can also contribute to the prevalence of unit elastic demand, as consumers are more aware of price changes and have the ability to quickly adjust their purchasing behavior.