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Unitary Elastic Demand

Updated on April 24, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Unitary Elastic Demand?

Unitary elastic demand is a type of demand which changes in the same proportion to its price. It means that the percentage change in demand is exactly equal to the percentage change in price. It is a fundamental used in economics to explain the responsiveness of variables to each other.

What Is Unitary Elastic Demand

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Thus, as the prices increase, the quantity of goods decreases and vice versa but in the same propertion. However, the thing to keep in mind is that expenditure and revenue will be the same as before at all the price levels in this category of goods.

Key Takeaways

  • Unitary elastic demand is a demand type that changes in the same proportion to its price. It means that the percentage change in demand equals the percentage change in price.
  • The demand curve should be horizontal to identify a pure elastic demand. A unit elastic product is one where the line is horizontal and vertical rather than vertical, which indicates pure inelastic demand.
  • The marginal revenue is zero in unitary elastic demand. 
  • The marginal cost surpasses marginal revenue if the price rises.

Unitary Elastic Demand Explained

Unitary elastic demand refers to the change in demand for goods and services in which the rate of decrease in demand is equal to the rate of rise in prices. The unitary represents the unit. It is also known as unit elastic demand because a unit increases by decreasing unit priceUnit PriceUnit Price is a measurement used for indicating the price of particular goods or services to be exchanged with customers or consumers for money. It includes fixed costs, variable costs, overheads, direct labour, and a profit margin for the organization.read more.

Unitary demand is most flexible across all demands. Unitary demand applies the rule of demand and supply.

Marginal revenueMarginal RevenueThe marginal revenue formula computes the change in total revenue with more goods and units sold." The value denotes the marginal revenue gained. Marginal revenue = Change in total revenue/Change in quantity sold. read more is zero in case of the unitary elastic demand curve.

Marginal costMarginal CostMarginal cost formula helps in calculating the value of increase or decrease of the total production cost of the company during the period under consideration if there is a change in output by one extra unit. It is calculated by dividing the change in the costs by the change in quantity.read more exceeds marginal revenue in case of price rise.

A company like Uber/Ola cab facility services uses this pricing sometimes to facilitate its premium customers by having surge pricing. These are some cases of unitary elastic demand example products. The price elasticity of demand is negative because it does not add anything above the previous turnover; moreover, the cost of salesCost Of SalesThe costs directly attributable to the production of the goods that are sold in the firm or organization are referred to as the cost of sales.read more increases.

The spending rate of the consumer remains the same at all the price levels. The perfect inverse relation between price and demand for goods.

As shown in the example above, the demand curveDemand CurveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal.read more is not curved but a straight line.

The company’s pricing policies settle consumers’ aggregate demandAggregate DemandAggregate Demand is the overall demand for all the goods and the services in a country and is expressed as the total amount of money which is exchanged for such goods and services. It is a relationship between all the things which are bought within the country with their prices.read more. Moreover, the market capture share remains the same, but the number of customers might decrease. This concept is quite significant among entities because it impacts the revenue of the company to a great extent. As per the concept, since the rate of rise in price offsets the rate of fall in demand, the final revenue earned remains the same. Even in case of the opposite situation, the impact will be the same.

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Formula

The formula used to calculate the above as follows.

Elasticity of demand = % change in quantity demanded / % change in price

If we rearrange the formula, we can write it as:

% change in quantity demanded / % change in price = 1

So, we can see from the above formula that the sensitivity of the demand is equal to the rate of change in price, which is termed as unitary elastic.

Graph

Unitary Elastic Demand Graph

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Let us understand the concept with the help of the unitary elastic demand curve given above. We have taken quantity in the X-axis and price in the Y-axis. In an economy, whenever the price of goods and services increases, the demand decreases because people buy less of it by switching to some other substitute products or stopping using the product completely. But the rate of decrease may vary.

In case of unit elastic demand, the quantity of the product demanded decreases at the same rate as the rise in price, as shown in the graph.

Example

Let us discuss an example of unitary elastic demand.

Let us assume that the price of juicer is $20 in the market and per day 50 units are sold. If the price increases to $28, the manufacturers notice that the demand of juicers fall to 30,

Let us understand this using the formula.

Elasticity of demand = % change in quantity demanded/ % change in price

Therefore, as per the formula,

The % change in quantity demanded = [(50-30)/50] x 100 = 40%

The % change in price = [(28-20)/20] x 100 = 40%

Thus, elasticity of demand = 40% / 40% = 1

Even the unitary elastic demand diagram proves how the above calculation applies in actual market.

Goods Impacted In Unitary Elasticity

The consumption pattern of the retail consumer is not fixed due to their fixed incomeFixed IncomeFixed Income refers to those investments that pay fixed interests and dividends to the investors until maturity. Government and corporate bonds are examples of fixed income investments.read more. So as the prices hit the market, they generally reduce the quantity of using those goods. But it cannot curtail the goods of basic necessity, and luxury goods are not impacted due to prices even if they react oppositely.

So, the unitary elastic demand example products covered here are those items which are general whose consumption can be avoided even like: –

  1. Mobile phones
  2. Home appliances

The producers of these items have seen a trend in their product revenue due to the pricing factor. Therefore, producers put the product on sale to boost their income by decreasing the selling price.

Advantages

The following are the advantages of unitary elastic demand formula.

Thus, the above are some of the advantages of the concept.

Disadvantages

The following are the disadvantages of unitary elastic demand formula.

  • Revenue is fixed for the products. Therefore, a producer needs to adopt the differentiation strategy to boost the margin.
  • Consumer consumption patterns are imbalanced due to fixed expenditure on the products.
  • Consumer reaction is very fast against the price changes. Therefore, sometimes it becomes difficult for organizations to predict of understand how their product demand is responding to changes in prices.
  • It impacts the demand for goods drastically. Consumers may shift to some other similar product or may not buy it at all. Thus, inspite of raising the prices, the manufacturers are not able to make profit because the demand comes down equally and revenue remains the same.
  • The organization with low margins finds it difficult to sustain because thin margins get eliminated for product expansion.

Along with the advantages, it is equally important to understand the disadvantages so that the idea can be used in the competitive market.

How To Identify?

How can we identify whether the product shows a unitary elastic demand diagram by looking at the graph?

  • If the demand curve is horizontal, it is pure elastic demand.
  • If the demand curve is vertically shaped, it is pure inelastic demand.
  • As soon as the line slows downward, it is a unit elastic demand product.

Company management and marketing analysts frequently refer to such graphs to understand the position of their products in the market so that they can make necessary changes to boost demand and avoid revenue downfall.

Frequently Asked Questions (FAQs)

What is the unitary elastic demand curve?

The unitary elastic demand curve is a rectangular hyperbola. Suppose the equal change in demand generates the exact change in the product price. Then, the demand is a unitary elastic demand.

What is the graph of unitary elastic demand?

Suppose the elasticity at every point is equal to one along with the demand curve shape, i.e., unitary elastic, then the graph of unitary elastic demand is a rectangular hyperbola.

What is the numerical value of unitary elastic demand?

The unitary elastic demand numerical value is equal to 1. In other words, the quantity changes at a rate equal to the price.

How to calculate unitary elasticity of demand?

To calculate elasticity, one must divide the percentage of supply or demand by the percent change in price. The result is the goods elasticity value. In addition, if the result equals 1, the good is unit elastic.

This article is a guide to what is Unitary Elastic Demand. We explain it with example, graph, formula, goods impacted, advantages & disadvantages. Also, you can learn more about investment from the following articles: –

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Comments

  1. Taofeeq adesina says

    Thanks alot

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