🛒principles of microeconomics review

key term - Unit Elastic

Definition

Unit elastic refers to a situation where the price elasticity of demand or supply is equal to 1, indicating that a 1% change in price leads to a 1% change in quantity demanded or supplied. This concept is crucial in understanding the relationship between price changes and their impact on consumer and producer behavior.

5 Must Know Facts For Your Next Test

  1. Unit elastic demand or supply means that a 1% change in price leads to a 1% change in quantity demanded or supplied.
  2. When demand or supply is unit elastic, the total revenue or total expenditure remains constant as price changes.
  3. Unit elastic demand or supply is the boundary between elastic and inelastic, where the elasticity coefficient is exactly 1.
  4. Unit elastic demand or supply is important in understanding the impact of price changes on consumer and producer behavior.
  5. Unit elastic situations are often used as a benchmark for analyzing the effects of price changes on market equilibrium and resource allocation.

Review Questions

  • Explain how the concept of unit elastic demand or supply relates to the relationship between price changes and quantity changes.
    • When demand or supply is unit elastic, a 1% change in price leads to a 1% change in quantity demanded or supplied. This means that the percentage change in quantity is equal to the percentage change in price, indicating a proportional response. In a unit elastic scenario, the total revenue or total expenditure remains constant as price changes, as the increase in quantity exactly offsets the decrease in price, or vice versa.
  • Describe the significance of unit elastic demand or supply in the context of price elasticity and its implications for consumer and producer behavior.
    • Unit elastic demand or supply is the boundary between elastic and inelastic, where the elasticity coefficient is exactly 1. This is an important concept because it helps to understand the impact of price changes on consumer and producer behavior. When demand or supply is unit elastic, a 1% change in price leads to a 1% change in quantity, indicating that consumers and producers are equally responsive to price changes. This information is crucial for businesses and policymakers in making decisions about pricing, production, and resource allocation.
  • Analyze how the concept of unit elastic demand or supply can be used as a benchmark for understanding the effects of price changes on market equilibrium and resource allocation.
    • The concept of unit elastic demand or supply is often used as a benchmark for analyzing the effects of price changes on market equilibrium and resource allocation. In a unit elastic scenario, a change in price leads to a proportional change in quantity, leaving the total revenue or total expenditure unchanged. This means that the market is in a state of balance, where the impact of price changes on consumers and producers is neutral. By understanding unit elastic situations, economists can then explore how deviations from unit elasticity, such as elastic or inelastic demand or supply, can lead to different market outcomes and resource allocation decisions.