Unitary Elastic Supply

Definition

Unitary elastic supply refers to a situation where the percentage change in quantity supplied is exactly equal to the percentage change in price, resulting in a price elasticity of supply equal to one. This means that if the price of a good increases by a certain percentage, the quantity supplied will also increase by the same percentage, indicating a proportional relationship between price and quantity supplied. Understanding unitary elastic supply is crucial as it helps in analyzing how producers respond to price changes, impacting overall market dynamics.

5 Must Know Facts For Your Next Test

1. When supply is unitary elastic, the total revenue remains constant when prices change because the changes in price and quantity supplied offset each other.
2. Unitary elastic supply typically occurs in markets where producers have flexible production processes that allow for quick adjustments in output.
3. This concept is often illustrated graphically with a straight line that runs through the origin, showing a constant slope.
4. Unitary elasticity can be significant in understanding agricultural products, where farmers may adjust output based on market prices while keeping their revenue stable.
5. The concept of unitary elastic supply helps businesses and policymakers make informed decisions regarding pricing strategies and market interventions.

Review Questions

• How does unitary elastic supply affect total revenue when prices change?
  • Unitary elastic supply directly impacts total revenue because when prices change, the percentage change in quantity supplied matches the percentage change in price. This means that any increase or decrease in price leads to an equivalent adjustment in quantity supplied, resulting in no net change to total revenue. Therefore, businesses can expect their earnings to remain stable even as market prices fluctuate.
• Discuss the conditions under which unitary elastic supply might be observed in real-world markets.
  • Unitary elastic supply can be observed in markets where producers have the ability to quickly adapt their output levels to match price changes. This flexibility is often seen in industries with low fixed costs and variable production processes, such as agriculture or certain manufactured goods. Additionally, if there are no significant barriers to entry or exit for producers, supply tends to be more responsive to price changes, leading to scenarios of unitary elasticity.
• Evaluate the implications of unitary elastic supply for business strategy and policy-making.
  • Understanding unitary elastic supply is critical for businesses and policymakers as it helps predict how changes in pricing will influence producer behavior and overall market dynamics. For businesses, knowing that their revenue will remain stable despite price fluctuations allows them to set pricing strategies that can maintain market share without risking financial loss. Policymakers can also utilize this knowledge when considering taxation or subsidy policies, as they will know that adjustments will lead to predictable changes in supply without drastically affecting total revenue.

Related terms

Elasticity of Supply: A measure of how much the quantity supplied of a good responds to changes in price, indicating whether supply is elastic (greater than one) or inelastic (less than one).

Perfectly Inelastic Supply: A situation where the quantity supplied remains constant regardless of price changes, resulting in a price elasticity of supply of zero.

Market Equilibrium:

The point at which the quantity supplied equals the quantity demanded, determining the market price and quantity of goods exchanged.