Constant Unitary Elasticity

Definition

Constant unitary elasticity refers to a situation where the elasticity of demand or supply for a good remains constant at a value of 1, regardless of the price level. This means that a 1% change in price will result in an equal 1% change in the quantity demanded or supplied, maintaining a unit elastic relationship between price and quantity.

5 Must Know Facts For Your Next Test

1. Constant unitary elasticity is a special case where the elasticity coefficient is exactly 1, meaning a 1% change in price leads to a 1% change in quantity.
2. This scenario is characterized by a linear demand or supply curve passing through the origin, with a slope of -1.
3. Constant unitary elasticity is often used as a simplifying assumption in economic models to make calculations and analysis more tractable.
4. The constant unitary elasticity case lies between the polar cases of perfect elasticity (infinite elasticity) and perfect inelasticity (zero elasticity).
5. Constant unitary elasticity implies that total revenue (price × quantity) remains constant when price changes, as the percentage change in quantity offsets the percentage change in price.

Review Questions

• Explain how constant unitary elasticity differs from the polar cases of elasticity.
  • Constant unitary elasticity represents a middle ground between the polar cases of perfect elasticity (infinite elasticity) and perfect inelasticity (zero elasticity). Unlike these extremes, constant unitary elasticity occurs when a 1% change in price leads to an equal 1% change in quantity, resulting in a linear demand or supply curve passing through the origin with a slope of -1. This means the percentage change in quantity demanded or supplied exactly offsets the percentage change in price, keeping total revenue constant.
• Describe the significance of constant unitary elasticity in economic analysis and modeling.
  • Constant unitary elasticity is often used as a simplifying assumption in economic models because it makes calculations and analysis more tractable. By assuming a unit elastic relationship between price and quantity, economists can more easily predict the effects of price changes on consumer or producer behavior. This assumption allows for straightforward derivation of formulas and predictions, such as the relationship between price changes and total revenue. While not always reflective of real-world conditions, constant unitary elasticity provides a useful benchmark for understanding economic concepts and their implications.
• Evaluate the practical applications and limitations of the constant unitary elasticity concept in the context of 5.2 Polar Cases of Elasticity and Constant Elasticity.
  • The constant unitary elasticity concept is valuable in the context of 5.2 Polar Cases of Elasticity and Constant Elasticity because it represents a middle ground between the extremes of perfect elasticity and perfect inelasticity. While the polar cases provide important theoretical benchmarks, constant unitary elasticity offers a more realistic scenario for analyzing real-world markets and consumer behavior. However, the practical application of this concept is limited by the fact that true constant unitary elasticity is rare in practice. Most goods and services exhibit elasticities that vary depending on factors such as price level, consumer preferences, and market conditions. Nonetheless, the constant unitary elasticity assumption remains a useful tool for simplifying economic models and generating insights about the relationships between price, quantity, and total revenue.

Related terms

Elasticity of Demand:

The measure of how responsive the quantity demanded of a good is to a change in its price, holding all other factors constant.

Elasticity of Supply:

The measure of how responsive the quantity supplied of a good is to a change in its price, holding all other factors constant.

Polar Cases of Elasticity: The extreme cases of elasticity where demand or supply is either perfectly elastic (infinite elasticity) or perfectly inelastic (zero elasticity).