what is unitary elastic

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12-10-2024

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Unitary Elasticity: When Price Changes Don't Affect Total Revenue

Have you ever wondered why some businesses can raise prices without seeing a drop in their total revenue? The answer might lie in the concept of unitary elasticity.

Unitary elasticity occurs when the percentage change in quantity demanded is equal to the percentage change in price. In simpler terms, if the price of a product increases by 10%, the quantity demanded decreases by 10%. This results in a unique scenario where total revenue remains unchanged.

Understanding the Concept:

To better grasp unitary elasticity, let's break it down with an example:

Imagine a bakery selling croissants for $2 each. They sell 100 croissants daily, generating a total revenue of $200. If the bakery increases the price to $2.20, the quantity demanded drops to 90 croissants.

• Price increase: ($2.20 - $2.00) / $2.00 = 10%
• Quantity decrease: (90 - 100) / 100 = -10%

Since the percentage change in price and quantity demanded are equal but opposite in sign, we can conclude that the demand for croissants is unitary elastic. The bakery's total revenue remains at $200 (90 croissants x $2.20).

Unitary Elasticity in Real-World Scenarios:

While unitary elasticity is a theoretical concept, it can be observed in certain real-world scenarios. Here are a few examples:

• Luxury Goods: Products like designer handbags or high-end cars often fall into this category. Consumers are willing to pay a premium for these items, but even a slight increase in price can significantly affect demand.
• Essential Goods: Basic necessities like gasoline or prescription drugs can also exhibit unitary elasticity. Consumers might be forced to buy these goods even if prices rise, but they will likely reduce their overall consumption.

Why Does Unitary Elasticity Matter?

Understanding unitary elasticity can be beneficial for businesses and consumers alike:

• Businesses: By understanding the elasticity of demand for their products, businesses can optimize pricing strategies.
• Consumers: Consumers can leverage their knowledge of unitary elasticity to make informed purchasing decisions.

Beyond the Basics:

While unitary elasticity is a fascinating concept, it's important to note that most goods are not perfectly unitary elastic. Demand for most products typically falls into one of two categories:

• Elastic Demand: When the percentage change in quantity demanded is greater than the percentage change in price (e.g., luxury goods).
• Inelastic Demand: When the percentage change in quantity demanded is less than the percentage change in price (e.g., basic necessities).

Further Reading:

To delve deeper into this topic, consider exploring the following resources:

• "Price Elasticity of Demand" by Prof. R. Glenn Hubbard and Anthony Patrick O'Brien - This chapter from "Economics" provides a comprehensive overview of price elasticity and its implications.

Conclusion:

Unitary elasticity is a unique economic concept that highlights the delicate balance between price and quantity demanded. While it's not a common occurrence in real-world scenarios, understanding it can provide valuable insights into the dynamics of supply and demand.