Unit ElasticWhen a Change in One Variable Directly Creates an Equal Change in Another Variable
The law of supply and demand is actually a combination of two economic principles: the law of supply, and the law of demand.
The law of supply states that if the price of a product increases, its supply also increases.
If the price decrease, it also follows that supply will also decrease.
As we can see, the supply of a product has a direct relationship with its price.
On the other hand, the law of demand states that if the price of a product increases, its demand will decrease.
If the price decrease, then its demand should increase. It shows us that the demand for a product has an indirect relationship with its price.
If we combine these two economic principles, we can infer that the optimal price of a product is determined by the relationship between its supply and demand.
If the price is too high, there would be more supply than demand leading to a surplus.
However, if the price is too low, there would be more demand than supply leading to a shortage.
Both situations mean a loss of potential profits for the supplier.
The optimal price of a product results in the supplier earning maximum profits and consumers getting the quantity that they want.
Now let’s go back to how a product’s price affects the rise and fall in its supply demand.
You see, in economics, there is this thing they call elasticity which measures the responsiveness of one variable to the changes in another variable.
Say, if the price of a product increases by 15%, by how much will its demand change?
This determines whether the supply or demand for a product is elastic, inelastic, or unit elastic (a.k.a. unitary elastic).
In this article, we will be discussing the concept of “unit elastic”.
What is Unit Elastic?
Elasticity is an economic concept used to measure the changes in one variable in response to another variable.
For example, if the price of a product increases by 17%, by how much will demand decrease?
If demand decreases by more than 17%, it is elastic.
On the other hand, if demand decreases by less than 17%, it is inelastic.
If demand decreases by 17% (which is the same percentage increase in price), then it is unit elastic.
Unit elastic (a.k.a. unitary elastic) is a term we use to describe a situation wherein a change in one variable is equally proportionate to the change in another variable.
If we were to make a line graph of the two variables, we should get a perfectly curve (demand) or straight (supply) line.
Economists frequently use the term “unit elastic” to describe supply or demand curves that a perfectly responsive to price changes (meaning that they change by an equally proportionate amount to the change in price).
Do note that while a product can have a unit elastic demand or supply, rarely will you encounter one in real life.
In most cases, a product will either be elastic or inelastic in response to changes in market conditions.
For example, the demand for basic commodities is fairly inelastic.
Even if the price increases, the demand for them shouldn’t decrease by that much because they are necessities.
People will buy still buy them even if there’s an increase in price.
The demand for a product is said to be elastic if it is highly sensitive to a change in price.
For example, the smartphone market is a highly competitive one.
If a smartphone producer would increase the price of its products, customers are likely to switch to another cheaper brand that offers relatively similar or even better products.
Unit Elastic Demand
Unit elastic demand refers to demand that perfectly responds to changes in the price of a product.
This means that if the price of a product changes by a certain percentage, then demand will also change by an equally proportionate percentage.
For example, if the price of a product increases by 16%, then its demand will also decrease by 16%.
If we were to put a number on it, the demand elasticity of a product with a unit elastic demand is 1 (or -1 if we consider that demand has an indirect relationship with price).
A product that has a unit elastic demand can be advantageous to a supplier.
Since any change in price will result in an equally proportionate change in demand, then whatever the price is, the revenue that the supplier earns will remain the same.
This gives the supplier a clear vision regarding their profit. Rather than focusing on the price of a product, the supplier can focus on the cost of producing such a product to increase their profits.
This allows the supplier to control the demand for their product.
However, it does have its drawbacks. For one, the revenue for the product stays the same whatever the price is.
This means that if the supplier wants to increase revenue, they have to find a strategy that doesn’t involve changing the price.
This also makes it dangerous for suppliers that are already earning low margins. There is this delicate balance between a product’s price and the demand for it.
Unit Elastic Supply
Unit elastic supply to supply that is perfectly responsive to the changes in the price of a product.
This means that any change in price will result in an equally proportionate change in supply.
If the price of a product increases by 23%, then its supply will also increase by 23%.
If the price decreases by 18%, then it also follows that supply will decrease by 18%.
The supply elasticity of a product that has a unit elastic supply is 1 (it’s positive since supply has a direct relationship with price).
Likewise with a product that has a unit elastic demand, one that has a unit elastic supply can also be advantageous to a supplier.
Since the supplier knows that the price and supply of a product have a perfect relationship, they can take into account the fluctuations in market price when deciding the production volume.
If prices are going up, then the supplier should increase an equally proportionate percentage in production volume.
If prices are going down, then the production volume should also decrease by an equally proportionate percentage.
This also has its drawbacks. If a supplier is already operating at full capacity in terms of their production, then they will have to make a decision when the price increases.
To accommodate the increase, the supplier will have to acquire a means to increase maximum production capacity.
This typically involves acquiring another production plant, which entails cost.
The supplier will have to decide whether the cost of increasing production to accommodate the increase in price is worth it.
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