🛒principles of microeconomics review

key term - Unitary Elastic Demand

Definition

Unitary elastic demand refers to a situation where the percentage change in quantity demanded is exactly equal to the percentage change in price. This means that a 1% change in price leads to a 1% change in quantity demanded in the opposite direction, resulting in a price elasticity of demand value of -1.0.

5 Must Know Facts For Your Next Test

  1. Unitary elastic demand is a special case of elastic demand, where the price elasticity of demand is exactly -1.0.
  2. With unitary elastic demand, a 1% increase in price leads to a 1% decrease in quantity demanded, and vice versa.
  3. Unitary elastic demand is often observed for goods that have close substitutes and for which consumers are highly sensitive to price changes.
  4. The revenue for a firm facing unitary elastic demand remains constant regardless of the price charged, as the percentage change in quantity demanded exactly offsets the percentage change in price.
  5. Unitary elastic demand is an important concept in understanding how changes in income and prices affect consumption choices, as it helps predict how consumers will respond to price changes.

Review Questions

  • Explain how the concept of unitary elastic demand relates to the responsiveness of quantity demanded to changes in price.
    • Unitary elastic demand refers to a situation where the percentage change in quantity demanded is exactly equal to the percentage change in price, but in the opposite direction. This means that a 1% increase in price will lead to a 1% decrease in quantity demanded, and vice versa. This reflects a high level of responsiveness of consumers to price changes, with a price elasticity of demand value of exactly -1.0. Understanding unitary elastic demand is crucial in analyzing how changes in income and prices affect consumption choices, as it helps predict how consumers will react to price fluctuations.
  • Describe the relationship between unitary elastic demand and the revenue of a firm.
    • When a firm faces unitary elastic demand, the total revenue generated by the firm remains constant regardless of the price charged. This is because the percentage change in quantity demanded exactly offsets the percentage change in price, leaving the total revenue unchanged. For example, if a firm raises the price by 1%, the quantity demanded will decrease by 1%, resulting in the same total revenue. This unique characteristic of unitary elastic demand has important implications for a firm's pricing and revenue strategies, as it suggests that the firm cannot increase its total revenue by adjusting the price.
  • Analyze the factors that contribute to the presence of unitary elastic demand in the context of changes in income and prices affecting consumption choices.
    • Unitary elastic demand is often observed for goods that have close substitutes and for which consumers are highly sensitive to price changes. In the context of changes in income and prices affecting consumption choices, the presence of unitary elastic demand suggests that consumers are willing to adjust their purchasing behavior in response to even small changes in prices. This may be due to the availability of alternative options, the relative importance of the good in the consumer's budget, or the degree of necessity or luxury associated with the good. Understanding the factors that contribute to unitary elastic demand, such as the availability of substitutes and the sensitivity of consumers to price changes, is crucial in predicting how consumption choices will be affected by changes in income and prices.

"Unitary Elastic Demand" also found in: