key term - Unit Elastic Supply

Definition

Unit elastic supply refers to a situation where the quantity supplied of a good or service responds proportionately to changes in its price. In other words, a 1% change in price leads to a 1% change in quantity supplied, resulting in a price elasticity of supply equal to 1.

5 Must Know Facts For Your Next Test

1. Unit elastic supply means that a 1% change in price leads to a 1% change in quantity supplied, resulting in a price elasticity of supply equal to 1.
2. Unit elastic supply is a special case of constant elasticity of supply, where the elasticity is fixed at 1 regardless of the price or quantity level.
3. Unit elastic supply represents the midpoint between the polar cases of perfectly elastic supply (infinite elasticity) and perfectly inelastic supply (zero elasticity).
4. The unit elastic supply curve is a straight line passing through the origin, with a constant slope that does not change as price or quantity changes.
5. Unit elastic supply is an important concept in understanding how producers respond to price changes and how markets achieve equilibrium.

Review Questions

• Explain how unit elastic supply is related to the concept of constant elasticity of supply.
  • Unit elastic supply is a specific case of constant elasticity of supply, where the price elasticity of supply is fixed at 1 regardless of the price or quantity level. This means that a 1% change in price will always lead to a 1% change in quantity supplied. The unit elastic supply curve is a straight line passing through the origin, representing this constant proportional relationship between price and quantity.
• Describe how unit elastic supply relates to the polar cases of elasticity and their significance.
  • Unit elastic supply represents the midpoint between the two polar cases of elasticity - perfectly elastic supply (infinite elasticity) and perfectly inelastic supply (zero elasticity). These polar cases define the boundaries of the elasticity spectrum, with unit elastic supply being the point where the responsiveness of quantity supplied to price changes is proportional (a 1% change in price leads to a 1% change in quantity). Understanding the unit elastic case and how it relates to the polar cases is crucial for analyzing how markets and producers respond to price changes.
• Evaluate the importance of unit elastic supply in the context of market equilibrium and producer decision-making.
  • Unit elastic supply is an important concept because it represents a unique point where changes in price and quantity supplied are proportional. This has significant implications for market equilibrium and producer decision-making. At unit elastic supply, producers can maximize revenue by raising prices, as the increase in price will be exactly offset by the decrease in quantity supplied, leaving total revenue unchanged. Additionally, unit elastic supply is a crucial benchmark for understanding how markets adjust to achieve equilibrium, as it represents the point where supply and demand forces are balanced and price changes have a neutral effect on total market outcomes.

Related terms

Price Elasticity of Supply:

The measure of the responsiveness of quantity supplied to changes in price, calculated as the percent change in quantity supplied divided by the percent change in price.

Constant Elasticity of Supply: A supply curve with a constant price elasticity of supply along its entire length, regardless of the level of price or quantity.

Polar Cases of Elasticity: The two extreme cases of elasticity - perfectly elastic and perfectly inelastic - which represent the boundaries of the elasticity spectrum.