Unit elastic demand

Definition

Unit elastic demand occurs when the quantity demanded of a good or service changes by the same percentage as the price change, resulting in a price elasticity of demand equal to one. This means that if the price increases or decreases by a certain percentage, the quantity demanded will respond in equal measure, indicating that consumers are perfectly responsive to price changes.

5 Must Know Facts For Your Next Test

1. Unit elastic demand is represented mathematically as a price elasticity of exactly one, indicating proportional responsiveness of quantity demanded to price changes.
2. When demand is unit elastic, total revenue remains unchanged when prices change because the increase in revenue from higher prices is offset by the decrease in quantity sold.
3. Goods with unit elastic demand typically have substitutes available, allowing consumers to switch easily based on price fluctuations.
4. Unit elastic demand can occur at specific price points along the demand curve, and is not necessarily true for all prices of a good.
5. Understanding unit elastic demand helps businesses set pricing strategies that maximize revenue without losing customers due to excessive price changes.

Review Questions

• How does unit elastic demand differ from elastic and inelastic demand?
  • Unit elastic demand is different from elastic and inelastic demand primarily in terms of responsiveness to price changes. In unit elastic demand, the percentage change in quantity demanded is equal to the percentage change in price, resulting in an elasticity of one. In contrast, elastic demand shows greater sensitivity, with an elasticity greater than one, while inelastic demand indicates less sensitivity, with an elasticity less than one. Understanding these distinctions helps businesses predict consumer behavior based on pricing strategies.
• Discuss the implications of unit elastic demand for businesses when setting pricing strategies.
  • For businesses, understanding unit elastic demand is crucial when developing pricing strategies. Since total revenue remains constant at unit elasticity, companies must be cautious about raising or lowering prices. If they increase prices too much, they might lose sales, but if they lower prices too much, they won't necessarily boost revenue significantly. Finding the right balance can help maximize profits while maintaining customer satisfaction and sales volume.
• Evaluate how the concept of unit elastic demand can impact market equilibrium and consumer choice.
  • Unit elastic demand can significantly impact market equilibrium and consumer choice by influencing how prices adjust based on shifts in supply or demand. If a product exhibits unit elastic demand, any change in price will lead to an equivalent change in quantity demanded, maintaining overall market stability. This responsiveness allows consumers to make informed choices based on price changes while prompting suppliers to adjust their offerings accordingly. As such, understanding this concept helps economists analyze market behaviors and predict potential shifts in consumer purchasing patterns.

Related terms

elastic demand: Elastic demand occurs when the quantity demanded changes by a larger percentage than the price change, leading to a price elasticity greater than one.

inelastic demand: Inelastic demand occurs when the quantity demanded changes by a smaller percentage than the price change, resulting in a price elasticity less than one.

price elasticity of demand: Price elasticity of demand measures how much the quantity demanded of a good responds to a change in its price, expressed as the percentage change in quantity demanded divided by the percentage change in price.