What is Unitary Elastic Demand?
Unitary elastic demand is a type of demand which changes in the same proportion to its price; this means that the percentage change in demand is exactly equal to the percentage change in price. In the unitary demand, the product elasticity is negative as the product price decrease does not help to generate more revenue. It sticks at the same level as before, only the quantity of goods sold is increasing.
Unitary Elastic Demand Formula
Example of Unitary Elastic Demand
Let’s discuss an example of unitary elastic demand.
As it is visible in the example shown above that the consumer expenditure on the product is not impacted by the market pricing. They adjust their consumption as per the prices prevailing in the market.
Goods which are 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.. So as the prices hit the market they generally reduce the quantity of using those goods. But the goods of basic necessity cannot be curtailed and even goods which are luxurious are not impacted due to prices even they react in the opposite manner
So the items covered here are those items which are of general nature whose consumption can be avoided even like:-
- Mobile phones
- Home appliances
Producers of these items have seen the trend in their product revenue due to the pricing factor. Producers put the product into the sale to boost their revenue by marginal decreasing the selling price.
Advantages of Unitary Elastic Demand
The following are the advantages of unitary elastic demand.
- The manufacturer has a clear vision regarding their turnover – Does not impact through price targetPrice TargetPrice Target in the context of stock markets, means the expected valuation of a stock in the coming future and the valuation may be done either by the stock analysts or by the investors themselves. For an investor, price target reflects the price at which he will be willing to buy or sell the stock at a particular period of time or mark an exit from their current position..
- Any goods quantity that is produced can be sold off by decreasing the selling price.
- The consumer budget did not reflect the change prices but the goods bought increase/decrease due to this activity.
- Consumer expenditure pattern remains the same – Don’t disturb due to price setting.
- Demand generated by the market can be adjusted by using the price control mechanism.
Disadvantages of Unitary Elastic Demand
The following are the disadvantages of unitary elastic demand.
- Revenue is fixed for the products. a producer needs to adopt the differentiation strategy to boost up the margin.
- Consumer consumption patterns misbalanced due to fixed expenditure on the products.
- Consumer reaction is very fast against the price changes.
- It impacts drastically the demand for goods.
- The organization with low margins are finding it difficult to sustain because of thin margins get eliminated as they go for product expansion.
Important Points About Unitary Elastic Demand Curve
- The unitary represents the unit. It is also known as unit elastic demand because of a unit increase by decrease 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..
- 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. is zero in unitary elastic demand.
- 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. exceeds marginal revenue in case of price rise.
- A company like Uber/Ola cab facility services uses this pricing sometime to facilitate its premium customers by having surge pricing.
- Price elasticity of demand is negative because it does not add anything above than the previous turnover moreover cost of sales increased.
- The spending rate of the consumer remains the same at all the price levels.
- The perfect inverse relation between price and demand for goods.
- 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. is not curved but a straight line as shown in the example above.
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. by consumers is settled by the way of pricing policy determined by the company. Moreover, market capture share remains the same but no. of customers might get decreased.
Way to Check for Unitary Elastic Demand
- If the Demand curve is in a horizontal line – Pure elastic demand.
- If the demand curve is Vertical shaped – Pure inelastic demand.
- As soon as the line is middle of Horizontal & vertical – Unit elastic demand product.
We can understand from the above example. As the prices increase, the quantity of goods decrease and vice versa. but the things to keep in mind is that expenditure and revenue will be the same as before at all the price level in this category goods
This has been a guide to what is unitary elastic demand and its definition. Here we discuss the unitary elastic demand curve with examples, advantages, and disadvantages. You can learn more about investment from the following articles –