Definition
Unitary Elasticity is a concept in economics that represents a situation where the price elasticity of demand is exactly one. This means that the percentage change in the quantity demanded is exactly equal to the percentage change in price. As a result, the total revenue (price multiplied by quantity) remains unchanged when the price changes.
Examples
- Bottled Water: Suppose the price of a bottle of water rises by 10%, and the quantity demanded drops by 10%. The total expenditure on bottled water remains the same, demonstrating unitary elasticity.
- Cinema Tickets: If the price of cinema tickets decreases by 15%, and the quantity demanded increases by 15%, the total revenue from ticket sales stays constant, indicating unitary elasticity.
Frequently Asked Questions (FAQs)
Q1: What is the formula for calculating unitary elasticity? A1: Unitary elasticity (E) can be calculated using the formula: \[ E = \frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}} \] When E = 1, the demand is considered unitary elastic.
Q2: How does unitary elasticity affect a business’s total revenue? A2: In the case of unitary elasticity, a business’s total revenue will remain constant regardless of changes in price. Any increase in the price will be offset by a proportional decrease in quantity demanded, and vice versa.
Q3: Can unitary elasticity apply to supply as well as demand? A3: Yes, unitary elasticity can apply to both the supply and demand curves. However, it is most commonly referred to in the context of demand.
Q4: What factors determine whether a good will have unitary elasticity? A4: Factors include the necessity of the good, the availability of substitutes, and the proportion of income spent on the good.
Related Terms
- Price Elasticity of Demand: A measure of the responsiveness of the quantity demanded of a good to a change in its price.
- Elastic Demand: When the price elasticity of demand is greater than one, indicating a high sensitivity to price changes.
- Inelastic Demand: When the price elasticity of demand is less than one, indicating low sensitivity to price changes.
- Total Revenue: The total amount of money a firm receives from sales of a good or service, calculated as the product of price and quantity sold.
Online References to Online Resources
- Investopedia: Unitary Elasticity
- Khan Academy: Price Elasticity of Demand
- Wikipedia: Price Elasticity of Demand
Suggested Books for Further Studies
- “Principles of Economics” by N. Gregory Mankiw
- “Microeconomics” by Robert Pindyck and Daniel L. Rubinfeld
- “Economics for Beginners” by Andrew McAfee
Fundamentals of Unitary Elasticity: Economics Basics Quiz
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