What is Unit Elastic?
Definition: Unit elastic is a business concept that means a change in price of an item produces a proportional change in the demand/supply quantity of the item. If the price of an item changes by a small margin, the quantity of the item will also change by a small margin and vice versa.
In business, unit elasticity is crucial when determining the price elasticity of supply and the price elasticity of demand for a given product or service.
Unit Elastic Example Explained
Unit elastic is part of the elasticity concept in economics. Elasticity measures the sensitivity of one variable to a change in another variable. In economics, elasticity is common when speaking about variables like price and quantity of a product.
The concept of unit elastic helps business analysts and economists to explain changes in demand or supply of goods. Particularly, the concept is helpful when there is a price change of the goods or when consumers’ income changes.
Unit Elastic Demand
Here, the concept of unit elastic helps economists to understand changes in demand of a certain product given a price change of the product. As such, unit elastic demand refers to the proportional change in the quantity of a product demanded because of a change in the price of the product. To understand this relationship, it is necessary to understand another concept called price elasticity of demand.
The price elasticity of demand express the percentage change in the quantity of a product demand as a unit of percentage in the price of the product. This concept enables economists to understand the responsiveness of demand quantity of a given product given price change. When the price elasticity coefficient of a product is 1, then a change in price of the product produces a proportional change in the quantity demanded. If the price of a candy changes by 15%, for example, the amount of candies demanded will also change by 15%. This, once again, is an evidence of unit elastic demand.
Therefore, the unit elastic demand of a product is 1. Since the relationship between price and demand is inverse (negative), the actual value of unit elastic demand is -1. However, economists write it as 1 because elasticity values are all absolute. Graphically, a convex line represents unit elastic demand.
The unit elastic demand curve appears because, at price zero, consumers will want as much of the product as possible. As the price increases, the quantity demanded continues to decrease. The quantity demanded is smallest when the price is at its highest.
Unit Elastic Supply
Unit elastic supply represents the situation where the change in the supply of a product is proportionate to the price change. If the price changes by 10%, unit elastic supply implies that supply will also change by 10%. This is because the price elasticity of supply (PES) is unitary or equal to 1. Unlike the price elasticity of demand which is negative, the price elasticity of supply is positive. This is due to the law of supply, which says, the quantity of a product increases with an increase in price if all other things remain constant. Therefore, the graph of unit elastic supply is an upward slopping straight line.
The unit elastic supply curve is upward slopping because a higher price incentivizes suppliers to offer more of the product. At Price P1, suppliers are willing to offer quantity Q1 of the product. Soon as the Price jumps to P2, the suppliers increase the quantity supplied to Q2. The graph for unit elastic supply starts from zero because no supplier is willing to offer products for free.
Unit elastic is one among five types of elasticity. The others are relatively elastic, relatively inelastic, perfectly elastic, and perfectly inelastic. These concepts help to explain important elasticities like price elasticity of demand, price elasticity of supply, cross elasticity, and income elasticity among other elasticities.