Definition: Unit elastic demand is an economic theory that assumes a change in price will cause an equal proportional change in quantity demanded. Put simply unitary elastic describes a demand or supply that is perfectly responsive to price changes by the same percentage. You can think of it as a unit per unit basis.
What Does Unit Elastic Demand Mean?
What is the definition of unit elasticity? The demand that changes proportionally to a change in price is elastic. A unit elastic demand follows a change in price when consumers have close substitute products to meet their needs.
Similarly, a unit elastic supply follows a change in price when supplies have close substitute products to produce. Because a change in the price of goods causes a same percentage change in the quantity demanded, or supplied, the elasticity of demand is equal to -1 (Ed = -1), and the unit elasticity of supply is equal to 1 (Es = 1).
Let’s look at an example.
Frank is an apple producer. The retail price of apples is $1.40 per pound, but Frank notices that consumers would be happier if the price was lower. So, he decides to put apples on sale for $1.27 per pound.
Frank sells on average 1,000 pounds of apples daily. With the previous price of $1.40, he earned $1,400 per day. With the new price, since the price of sales has decreased by 10.24%, Frank expects that the quantity supplied will increase by the same percentage.
With the new price, more consumers are motivated to buy apples. Therefore, Frank now sells $1,102.4 pounds per day, earning $1,400 again.
Es = (1.40 / 1.27 ) – 1 / ( 1.102.4 / 1,000 ) – 1 = 10.24% / 10.24% = 1
If the price of apples rises to $1.85 per pound, an increase of 32.1%, consumers can switch to a substitute good. Therefore, Frank will sell 678.6 pounds per day, earning $1,255.4.
Ed = ( 1.85 / 1.40 ) – 1 / ( 678.6 / 1000 ) – 1 = 32.1% / – 32.1% = -1
Define Unit Elastic Demand: Unitary elastic demand occurs when consumers’ demand for a product is proportionally related to the product’s price.