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.
- 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
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
### What is the price elasticity of demand for a good with unitary elasticity?
- [x] Exactly one
- [ ] Greater than one
- [ ] Less than one
- [ ] Zero
> **Explanation:** When the price elasticity of demand is exactly one, the good is said to have unitary elasticity.
### What happens to total revenue if a good has unitary elasticity?
- [x] It remains constant.
- [ ] It increases.
- [ ] It decreases.
- [ ] It becomes unpredictable.
> **Explanation:** In the case of unitary elasticity, total revenue remains unchanged even as the price changes.
### How do you calculate the price elasticity of demand?
- [x] Percentage change in quantity demanded divided by the percentage change in price
- [ ] Percentage change in price divided by percentage change in quantity demanded
- [ ] Total revenue divided by total costs
- [ ] Price divided by quantity
> **Explanation:** The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price.
### Which of the following is most likely to have unitary elasticity?
- [x] Bottled water
- [ ] Lifesaving medicine
- [ ] Luxury cars
- [ ] Basic food items
> **Explanation:** Bottled water is an example where the proportional change in price could likely result in a proportional change in quantity demanded.
### If the price of a product with unitary elasticity doubles, what happens to the quantity demanded?
- [ ] It also doubles.
- [x] It halves.
- [ ] It remains the same.
- [ ] It triples.
> **Explanation:** For a product with unitary elasticity, a doubling in price is matched by a halving in quantity demanded, so total spending remains constant.
### What aspect of a good influences whether its demand will be unitary elastic?
- [x] Availability of substitutes
- [ ] Seasonal trends
- [ ] Marketing expenditures
- [ ] Quality of the product
> **Explanation:** The availability of substitutes is a major factor that influences the price elasticity of demand, including unitary elasticity.
### What tends to happen with a product’s price elasticity of demand over the short term?
- [ ] It increases.
- [ ] It decreases.
- [x] It remains relatively inelastic.
- [ ] It fluctuates frequently.
> **Explanation:** Over the short term, most products tend to have relatively inelastic demand as consumers or businesses take time to adjust to price changes.
### Which of the following scenarios depicts unitary elasticity in action?
- [ ] A 5% price drop leads to a 10% increase in demand.
- [ ] A 10% price rise leads to a 5% decrease in demand.
- [x] A 20% price increase leads to a 20% decrease in demand.
- [ ] An economic crisis.
> **Explanation:** A 20% price increase leading to a 20% decrease in quantity demanded is a classic example of unitary elasticity.
### Why might a business care about whether its product has unitary elasticity?
- [ ] To increase profit margins
- [x] To maintain consistent revenue
- [ ] To lower production costs
- [ ] To enhance brand loyalty
> **Explanation:** A business would care about unitary elasticity to maintain consistent revenue despite changes in the product’s price.
### In economics, what does it mean if a product has an elasticity value of 1?
- [ ] The product is perfectly elastic.
- [x] The product is unitary elastic.
- [ ] The product is perfectly inelastic.
- [ ] The demand is unitary inelastic.
> **Explanation:** An elasticity value of 1 means the product is unitary elastic.
Thank you for exploring the concept of unitary elasticity in our economic glossary and tackling the illustrative quiz questions. Continue advancing your economic understanding!
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