21 May Unit Elastic
What is Unit Elastic?
Definition: Unit elastic refers to a change in price that results in a proportional change in demand for a certain product. An increase in price will lead to a fall in demand and a decrease in price will have the opposite effect, leading to an increase in demand.
What does Unit Elastic mean?
Elasticity is an important concept in economics. It can apply to both supply and demand.
For example, if a change in price does not result in a change in demand for a certain product, its demand is said to be inelastic. The demand for certain life-saving medicines could be inelastic. People will buy these medicines regardless of their cost.
On the other hand, the demand for most goods is elastic. A rise in price will lead to a fall in demand. Conversely, if prices fall, demand for most goods will increase.
With this background, you will be able to understand the meaning of unit elastic. If a change in price leads to an equal proportional change in demand, the demand for that good is said to be unit elastic.
The demand for a good is said to be unit elastic if a change in its price results in an equal proportionate change in the demand for it.
Example of Unit Elastic
Hyonix, a Chinese company that manufactures cell phones, has priced its base model at $150. It sells 75,000 units every month at this price. When it raises prices by 10% to $165 per unit, sales drop by 10% to 67,500 units.
Hyonix realizes that the demand for its base model cell phone is unit elastic. An increase in price results in an equally proportionate fall in demand.
If the percent change in the demand for a product is equal to the percent change in its price, the demand for that product is unit elastic.