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💵principles of macroeconomics review

key term - Unit Elastic

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Definition

Unit elastic refers to a situation where the percentage change in quantity demanded or supplied is equal to the percentage change in price. In other words, the elasticity value is exactly 1, indicating that a 1% change in price will result in a 1% change in quantity, in the opposite direction.

5 Must Know Facts For Your Next Test

  1. Unit elastic demand or supply means that a 1% change in price will result in a 1% change in quantity, in the opposite direction.
  2. When demand or supply is unit elastic, total revenue or total expenditure remains constant despite changes in price and quantity.
  3. Unit elastic demand or supply is the midpoint between elastic and inelastic, where the elasticity value is exactly 1.
  4. Unit elastic situations are important because they represent the point where changes in price have a proportional impact on quantity, with no change in total revenue or expenditure.
  5. Understanding unit elastic scenarios is crucial for businesses and policymakers to predict the impact of price changes on market outcomes.

Review Questions

  • Explain the concept of unit elastic demand or supply and how it differs from elastic and inelastic scenarios.
    • Unit elastic demand or supply refers to a situation where the percentage change in quantity demanded or supplied is exactly equal to the percentage change in price. This means that a 1% increase in price will result in a 1% decrease in quantity demanded or supplied, and vice versa. Unit elastic scenarios are the midpoint between elastic (where the percentage change in quantity is greater than the percentage change in price) and inelastic (where the percentage change in quantity is less than the percentage change in price). In a unit elastic situation, total revenue or total expenditure remains constant despite changes in price and quantity.
  • Describe the significance of understanding unit elastic scenarios in the context of price elasticity of demand and supply.
    • Comprehending unit elastic situations is crucial for businesses, consumers, and policymakers to predict the impact of price changes on market outcomes. When demand or supply is unit elastic, a change in price will result in a proportional change in quantity, with no change in total revenue or total expenditure. This knowledge allows stakeholders to anticipate the effects of price adjustments and make informed decisions about pricing strategies, production levels, and policy interventions. Understanding unit elastic scenarios is essential for analyzing market equilibrium, consumer behavior, and the overall efficiency of resource allocation in an economy.
  • Analyze how the concept of unit elastic demand or supply can be applied to areas beyond just price and quantity, such as in the context of elasticity in other economic variables.
    • The concept of unit elasticity can be extended beyond just the relationship between price and quantity. The principle of unit elasticity can be applied to measure the responsiveness of any dependent variable to changes in an independent variable, in areas such as income elasticity of demand, cross-price elasticity of demand, and elasticity of substitution. For example, in the case of income elasticity of demand, a unit elastic scenario would indicate that a 1% increase in income results in a 1% increase in quantity demanded for a particular good or service. Similarly, unit elastic substitution would mean that a 1% change in the relative price of two goods leads to a 1% change in the quantity demanded ratio between those goods. Understanding unit elastic relationships in these broader economic contexts can provide valuable insights for businesses, consumers, and policymakers in their decision-making processes.