Lisa Borga

Unitary elastic demand, or unit elastic demand, is a type of demand in which the number of units demanded changes in proportion to a change in price.

In other terms, unitary elastic demand describes a type of demand that is perfectly responsive to changes in price.

This means that a rise in price will not increase revenue because it will result in an equal and proportional decrease in the amount of a good or service sold.

Unitary elastic demand and other types of elasticity are fundamental concepts in economics that allow businesses to determine optimal pricing for their products.

## Essential Points

• Elastic, unitary elastic, and inelastic demand are all different types of elasticity that are crucial to determining how responsive demand is to changes in price.
• Unitary elastic demand means that demand for a good or service will change in equal proportion to a change in price.
• For a product with unitary elastic demand, a change in price will not result in a change in revenue because demand will change in equal proportion to price.

## Unitary Elastic Demand Explained

Unitary elastic demand is a type of demand in which any change in the price of a good or service results in an equal proportional change in the quantity demanded.

This means that the percentage change in price for a product will exactly match the percentage change in demand resulting in no change to total revenue.

This is one of the central types of elasticity of demand which measure the change in consumption of a product relative to changes in price.

The formula for price elasticity of demand is:

Price Elasticity of Demand = Percentage Change In Quantity Demanded / Percentage Change in Price

Resulting values greater than one indicate that demand is elastic, which indicates that a change in price will have a significant impact on the quantity demanded of a good or service.

In other words, a rise in price will cause a significant reduction in demand, and a reduction in price will have the opposite effect.

Values less than one indicate the opposite.

In other words, a change in price will have little impact on the quantity demanded of a good or service.

For a product with inelastic demand, an increase or reduction in price will have little impact on the quantity demanded.

When the resulting value of price elasticity of demand is precisely one, the demand is unitary elastic.

This means that any change in price for a good or service will have an equal and inverse effect on the quantity demanded.

If a company offering a product with a unitary elastic demand were to raise prices, demand for the product would decrease proportionally, and the opposite would occur if prices were lowered instead.

## What Goods Have Unitary Elastic Demand?

Perfectly unitary elastic demand rarely occurs because most goods will be either elastic or inelastic when price changes occur.

However, some examples are goods that are important to consumers in their daily lives but not essential.

Some examples of this are household appliances and electronic devices.

For example, if the price of a common household appliance, such as a washing machine, is raised in price by 20%, consumers are more likely to put off upgrading or to replace their current washing machine.

This will likely result in a roughly proportional inverse change in the quantity demanded of the washing machine.

The same will generally apply to other common household appliances such as dishwashers and clothes dryers.

A change in price will be offset by the change in consumer demand resulting in no change to total revenue.

## Importance of Unitary Elastic Demand

The elasticity of demand is a crucial concept for businesses to understand, and it plays a considerable role in optimizing product pricing.

Companies devote a significant amount of effort to determining their customers’ behavior and the elasticity of demand for their product offerings.

By determining how elastic the demand for their goods is, a company can better determine optimum pricing both for maximizing revenue and better meeting the needs of their customers.

When a company finds that the price elasticity of demand for a product they offer is unitary elastic, it means that a price change will not impact total revenue, which means that changes to price can be made based on other factors such as manufacturing expenses and customer satisfaction.

This is crucial information for improving business performance and better meeting the needs of customers.

## Pros and Cons of Unitary Elastic Demand

Just as with any type of demand, unitary elastic demand has benefits and downsides to consider.

Here are a few of the major ones to consider.

### Pros

• Unitary elastic demand makes it simple to determine turnover and optimize inventory levels to match consumer demand.
• Excess inventory can quickly be cleared by reducing prices.
• Demand can be more precisely controlled by changing the pricing of goods and services.

### Cons

• Changes in price cannot result in an increase in revenue for products with unitary elastic demand. This means that other methods must be used in order to achieve better margins.
• Consumers are quickly affected by changes in price, which may affect consumers’ opinions regarding a company.
• For companies that earn low margins from the sale of a good or service, it may be difficult to sustain operations due to the inability to expand demand without lowering prices.

## Example of Unitary Elastic Demand

XYZ Company Sells a type of widget that it has ordinarily sold for \$10 per widget.

At this price, it has sold approximately 1,000 widgets per year, resulting in total revenue of \$10,000 annually.

This year the XYZ Company has raised the prices of its widgets to \$15 per widget, which resulted in a decrease in the number of widgets it sold this year to only 500 widgets.

The decrease in demand exactly offset the change in the price of selling the widget resulting in no change in revenue.

Both before and after the change in price, the total revenue remained at \$10,000. As a result, the company concluded that demand for its widget is unitary elastic.

## Conclusion

Unitary elastic demand is one of the types of price elasticity of demand.

A change in price for a good or service with unitary elastic demand will result in an equal and inverse change in the quantity demanded.

Importantly for companies offering such products, the total revenue will remain the same both before and after a change in price.

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1. Iowa State "Elasticity of Demand" Page 1 - 2. November 2, 2022