In economics, elasticity is a measure of how much other variables, such as price, supply, consumer options, and income, affect demand for a good. Using the demand curve and graph, we’ll look at what it means for a product’s demand to be unit elastic in this article.
Variables in economics can cause a good’s elasticity to change dramatically and disproportionately. Consider the price of gasoline. People don’t go out and buy a ton of gas when the price of gas drops unless it’s to fill up their car’s gas tank.
There are two key terms to understand the relationship between demand and other variables:
Elasticity: When a good or service’s demand responds to changes in economic variables, it is said to be elastic.
Inelasticity: When a good or service’s demand is inelastic, it does not respond to economic variables.
Simply divide the percentage change in supply or demand by the percentage change in price to calculate a good’s elasticity.
What is Unit Elastic?
Unit elastic (also known as unitary elastic) is a term used in economics to describe a situation in which a change in one variable causes an equally proportional change in another variable. The concept of unit elastic is closely related to elasticity, which is a fundamental concept in economics. Elasticity in this context refers to the sensitivity of one variable to changes in another variable.
As an example, if a product’s price rises by 10%, demand falls by 10%. Unit price elasticity can be either inverse or direct:
Economists primarily use elasticity to assess the demand or supply of a good in response to changes in the price of a good or in consumer income. As a result, the term “unit elasticity” is frequently used to describe perfectly responsive demand or supply curves to price changes.
It should be noted that finding unit elastic goods is extremely difficult. Most goods are either elastic or inelastic in relation to market changes.
Unit elastic demand and unit elastic supply are the two primary measures of unit elasticity. We’ll look into these in-depth.
Unit Elastic DemandÂ
A unit elastic demand is one in which any change in the price of a product results in an equally proportional change in the quantity demanded. In other words, unit elastic demand implies that the percentage change in quantity demanded equals the percentage change in price. A good’s demand elasticity with unit elastic demand is one (strictly speaking, elasticity equals -1 since the demand curve is downward sloping; but in most cases, elasticity is calculated as an absolute value).
The concept of “elasticity” has important implications for businesses. If a company sells goods with unit elastic demand, its pricing strategy must be carefully considered. The main reason for this is that a significant change in price will result in a significant change in the quantity demanded.
Significant changes in demand, obviously, can have a significant impact on a company’s profitability. For example, if it sells smartphones with unit elastic demand, a 10% price increase will result in a 10% decrease in demand. As a result, the company’s sales will fall by 10%.
Unit elastic demand is shown graphically as a curve rather than a straight line.
Example Of Unit Elastic Demand
Peter grows bananas and sells them to customers for $1.50 a pound. Customers have told him that the price is too high for them. Therefore, they are considering buying apples, pears, and mangoes instead. So, what if Peter decided to lower his price and sell the bananas for $1.29 per pound?
To simplify the computation, let’s assume he sells 1000 pounds of bananas per day. The daily sales would be $1,500 at the previous price of $1.50 per pound.
Peter uses unit elastic demand principles and expects the quantity he supplies to increase by the same 16.28 percent at the new price of $1.29 (a 16.28 percent decrease in price). This means he’d have to sell 1162.8 bananas at $1.29 to earn the same $1,500 per day.
If Peter decides to raise the price of bananas from $1.50 to $1.90 (a 26.67 percent increase), it is very likely that consumers will switch to apples, pears, or another substitute good.
In terms of Peter’s sales, this means he now sells 733.3 pounds per day at $1.90 and earns $1,393.27.
The Advantages of Unit Elastic Demand
- The manufacturer has a clear vision for their turnover – it is not influenced by the price target.
- Any manufactured goods can be sold by lowering the selling price.
- The consumer budget does not reflect the price change. However, the goods purchased increase or decreases as a result of this activity.
- Consumer spending habits do not change as a result of price changes.
- Using the price control mechanism, one can adjust the demand generated by the market.
Disadvantages of Unit Elastic Demand
- The revenue for the products is fixed. As a result, in order to increase margins, a producer must employ a differentiation strategy.
- Consumption patterns of consumers are unbalanced as a result of fixed expenditure on products.
- Consumers react very quickly to price changes.
- It has a significant impact on the demand for goods.
- Because thin margins are eliminated for product expansion, the organization with low margins finds it difficult to sustain.
Important Notes on the Unit Elastic Demand Curve
- The unit is represented by the unitary. Because of a unit increase by decreasing unit price, it is also known as unitary elastic demand.
- Across all demands, unit demand is the most adaptable.
- The demand and supply rule is applied to unit demand.
- In the case of unitary elastic demand, the marginal revenue is zero.
- In the event of a price increase, the marginal cost surpasses the marginal revenue.
- Surge pricing is used by companies such as Uber/Ola cab facility services to assist its premium consumers.
- The price elasticity of demand is negative since it adds nothing to the prior turnover; additionally, the cost of sales has grown.
- The consumer’s spending rate remains constant across all price levels.
- The perfect inverse relationship between the price of goods and their demand.
- The demand curve is not curved; rather, it is a straight line.
- The pricing policies of the company settle the aggregate demand of consumers.
- Furthermore, while the market capture share remains constant, the number of customers may decrease.
How to Determine Unit Elastic Demand
It is pure elastic demand if the Demand curve is horizontal.
If the demand curve is vertical in shape, it is pure inelastic demand.
It is a Unit elastic demand product as soon as the line is horizontal and vertical.
Unit Elastic Supply
Unit elastic supply is a supply that is perfectly responsive to price changes. To put it another way, any change in the price of a good with unit elastic supply results in an equally proportional change in the quantity supplied. A good’s supply elasticity with unit elastic supply is one (unlike the demand curve, the supply curve is upward sloping; thus, the elasticity of unit elastic supply is simply 1).
Unit elasticity of supply, like unit elasticity of demand, has significant business implications. For example, if a company manufactures goods with unit elastic supply, it means that the company’s production capacity should account for price fluctuations. If the price of a product changes significantly, a company should adjust its production accordingly.
Unit elastic supply is represented graphically as a straight line beginning at the origin (point 0;0).
Products Affected by Unit Elasticity
Because of their fixed income, the retail consumer’s consumption pattern is not fixed.
As a result, as prices rise, the number of people who use those goods decreases. However, it cannot restrict goods of basic necessity, and price fluctuations do not affect luxury goods, even if they react in the opposite direction.
So, the items covered here are those that are common and whose consumption can be avoided, such as: –
- Cell phones
- Household appliances
The manufacturers of these items have noticed a trend in their product revenue as a result of the pricing factor. As a result, producers put the product on the market in order to increase their profits by lowering the selling price.
Elastic Demand vs. Inelastic Demand
Elastic demand for a product is a situation in which a small change in the product’s price results in a significant difference in demand for the product. When there is a substitute, such a scenario occurs. Consider the case of tea and coffee, both of which can be substituted for one another. When the price of coffee is lower than that of tea, people prefer it over tea. However, as the price of coffee rises, an increasing number of people switch to tea, and vice versa. This is an excellent example of a product with elastic demand. The elastic product’s price elasticity of demand is greater than one because the percentage change in demand is greater than the percentage change in price.
Inelastic demand for a product occurs when a significant change in the product’s price does not result in a discernible difference in demand. This scenario occurs when there are few or very few good substitutes for the product. Consider gasoline/petrol, which is a prime example of inelastic demand.
When gasoline prices rise, the impact on demand is minimal because it does not fall significantly. However, because there are few good gasoline substitutes, people must purchase gasoline even at increased prices. This is an example of a product with inelastic demand. As a result, the inelastic product’s price elasticity of demand is less than one since the percentage change in demand is smaller than the % change in price.
Key Differences Between Elastic and Inelastic Demand
- In the case of elastic demand, demand remains highly volatile and varies greatly in response to price fluctuations. For inelastic demand, demand is particularly sticky and does not respond to price changes in a significant way.
- In the case of elastic demand, a suitable substitute is readily available. Inelastic demand, on the other hand, does not follow this pattern. The substitutes allow you to switch whenever the price changes.
- Furthermore, a person’s necessity determines the type of demand. A luxury item is subject to elastic demand, whereas an essential item is subject to inelastic demand. People are willing to pay higher prices for necessities.
- Price and total revenue move in the opposite direction in the case of elastic demand, i.e., because the decline in demand is greater than the price increase, resulting in lower revenue (= Price * Demand) and vice versa. In the case of inelastic demand, both move in the same direction, i.e., because the decrease in demand is less than the increase in price, which may result in increased revenue and vice versa.
Conclusion
We can see in this article that as prices rise, so does the quantity of goods available, and vice versa. However, keep in mind that expenditure and revenue will remain the same at all price levels in this category of goods.
Unit Elastic FAQs
What is an example of a unit elastic product?
Electronics like mobile phones, home appliances, and vital electrical devices are good examples of unit elastic products. As an example, consider mobile phones, vital electrical devices, and home appliances.
Is unit elastic the same as perfectly elastic?
Unitary elasticities show that either demand or supply is proportionally responsive. Perfectly elastic means that the price response is complete and infinite. This means that a change in price causes the quantity to decrease to zero.
