Unit elastic demand is the economic theory that assumes a change in product price causes an equal and proportional change in the quantity demanded. In other words, the percentage change in demand for the product is equal to the percentage change in price. Think of the elastic demand as a unit per unit basis.
Unit Elastic Demand Meaning
Elastic demand is how economists describe the relationship between the number of products sold and the price (along with other factors).
It’s most commonly seen in the way that consumers react to a product price change. If the price goes down a little, the consumer buys a lot more, if the price rises a little, the consumer will stop buying and wait for prices to return to a previous or lower level.
Unit elastic demand is a form of demand elasticity where the quantity demanded will change by the same percentage and the price changes. This happens in markets where the consumer has substitute products available that will meet their needs.
This also applies to the unit elastic supply because when a supplier has close substitute products to produce the goods, the percentage change of the price of a good is the same as the percentage change to the quantity supplied.
Since the percentage change in price is the same as the percentage change in the quantity demanded and supplied, the elasticity of demand for each is:
$$Ed = -1$$
$$Es = 1$$
- Ed = elasticity of demand
- Es = elasticity of supply
Confused by unit elastic demand and price elasticity? Below we’ll work through a basic example to help you understand the concept.
Unit Elastic Demand Example
Sam produces bananas and sells them to the consumer at $1.50 per pound. The feedback he gets from the customers is that the price is too high for them, and they are considering buying apples, pears, and mangoes instead. So what would happen if Sam decided to reduce his price and sell the bananas at $1.29 a pound?
Let’s assume he sells 1000 pounds of bananas daily to make the calculation simple. At the previous price of $1.50 a pound, the daily sales would be $1,500.
At the new price of $1.29 (a 16.28% decrease in price), Sam uses unit elastic demand principles and expects the quantity he supplies to increase by the same 16.28%. This means he would now expect to sell 1162.8 bananas at $1.29 to make the same $1,500 a day.
$$Es = \dfrac{1.5}{1.29} - \dfrac{1}{1162.8/1000} - 1 = 16.28\%$$
If Sam decided to increase the price of the bananas from $1.50 to $1.90 (an increase of 26.67%) then it’s very likely that consumers will switch to apples, pears or some other substitute good.
For Sam’s sales, this would mean he now sells 733.3 pounds a day at $1.90 and earns $1,393.27.
$$Ed = \dfrac{1.9}{1.5} - \dfrac{1}{733.3/1000} - 1 = 26.67\%$$
Unit Elastic Demand Analysis
The unit elastic demand is at the midpoint of the demand curve.
The bottom half of the curve shows an inelastic demand because if the price rises, at any quantity below the midpoint, the expenditure increases despite the fact that the quantity is falling.
At the top half of the diagram, the curve is elastic. This is because if prices rise at any point above the midpoint (unit elasticity) the expenditure decreases as the quantity falls.
Conclusion
- Unit elastic demand is one of the five types of elasticity of demand
- It describes the way demand for a product changes by the same percentage as the price of the product changes
- Put simply, if the price of a product decreases by 5%, with unit elastic demand, the demand for that product will increase by 5%
- The same applies to the unit elastic supply in the opposite direction: the percentage in price change is the same as the percentage change for the quantity supplied
- The unit elastic demand sits at the midpoint of the demand curve, with the bottom half inelastic and the top half elastic.