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🛒principles of microeconomics review

key term - Constant Unitary Elasticity

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Definition

Constant unitary elasticity refers to a situation where the elasticity of demand or supply for a good remains constant and equal to 1 regardless of the price level. This means that a 1% change in price will result in a 1% change in 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 of constant elasticity, where the elasticity value is exactly 1.
  2. With constant unitary elasticity, total revenue remains constant as price and quantity change, since the percentage change in price is exactly offset by the percentage change in quantity.
  3. Constant unitary elasticity is an important concept in the analysis of consumer and producer behavior, as it represents a unique point on the elasticity spectrum.
  4. Goods with constant unitary elasticity are often considered to have no substitutes or complementary goods, as consumers have a fixed willingness to pay regardless of price changes.
  5. The concept of constant unitary elasticity is closely tied to the notion of the total revenue test, which states that total revenue is maximized when elasticity is unitary.

Review Questions

  • Explain how constant unitary elasticity differs from other polar cases of elasticity, such as perfect elasticity and perfect inelasticity.
    • Unlike perfect elasticity, where a small change in price leads to an infinite change in quantity, or perfect inelasticity, where quantity is completely unresponsive to price changes, constant unitary elasticity represents a unique case where a 1% change in price results in a 1% change in quantity. This means that the elasticity remains constant at a value of 1, regardless of the price level. This has important implications for the relationship between price, quantity, and total revenue, as total revenue remains unchanged with price and quantity changes under constant unitary elasticity.
  • Describe the relationship between constant unitary elasticity and the total revenue test.
    • The concept of constant unitary elasticity is closely tied to the total revenue test, which states that total revenue is maximized when elasticity is unitary. This is because with constant unitary elasticity, a 1% change in price is exactly offset by a 1% change in quantity, leaving total revenue unchanged. This means that firms can raise prices without losing total revenue, up until the point where elasticity is no longer unitary. Understanding the relationship between constant unitary elasticity and the total revenue test is crucial for firms seeking to optimize their pricing strategies.
  • Analyze how the presence of substitutes or complementary goods might affect the likelihood of a good exhibiting constant unitary elasticity.
    • Goods with constant unitary elasticity are often considered to have no close substitutes or complementary goods, as consumers have a fixed willingness to pay regardless of price changes. The presence of substitutes would make the demand more elastic, as consumers would be more responsive to price changes and switch to alternatives. Likewise, the presence of complementary goods would affect the demand elasticity, as changes in the price of one good would impact the demand for the other. Therefore, the likelihood of a good exhibiting constant unitary elasticity is higher when there are no close substitutes or complementary goods available to consumers, as this allows for a fixed, unit-elastic relationship between price and quantity.

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