Brianna has a masters of education in educational leadership, a DBA business management, and a BS in animal science.
Cost Vs. Demand
Say hello to Sandy! Sandy owns her own business: Cookies, Cakes, and More. All Sandy's products are prepared and baked right on the premises and range from traditional chocolate chip cookies to her famous oatmeal raisin cookies. Sandy also specializes in custom birthday and wedding cakes.
Sandy has always earned a pretty good living from her cookie and cake business, but lately the price of raisins has risen drastically. Since Sandy is known for her oatmeal raisin cookies, she just can't stop making them to reduce her costs. Instead, Sandy decides to raise the price of her famous cookies gradually in the hopes that her customers will continue to purchase them.
For example, Sandy starts by raising the price of her oatmeal raisin cookies from $2.00 to $2.05. The next week she raises the price to $2.10. Sandy continues to raise the price of the cookies on a weekly basis until they cost $2.50. Although Sandy's oatmeal raisin cookies continue to sell, she notices that each weekly increase in the price of the cookies is accompanied by a proportional decrease in the number of customers who stop buying the cookies. In business, this is known as the unit elastic.
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Unit Elastic: Definition
Right now you may be asking yourself, what does unit elastic mean? Unit elastic is a change in price that causes a proportional change in the quantity demanded. In everyday language, this means that when the price of an item increases, the number of consumers who are willing to buy it will also change. For example, if Sandy raises the price of her famous oatmeal raisin cookies by $1.00, the unit elastic demand for that $1.00 increase would result in a decrease in the quantity demanded by one unit. As the final cost of the cookie, which was $2.50, reflected a 25% increase in price, the number of customers who purchased it decreased by 25%.
Revenue & Options
Now that Sandy's gone and raised the price of her oatmeal raisin cookies, what effect will the higher price have on her revenue, and income? Here, since the demand for the cookies is a unit elastic, the increase in the cost of the cookies will have no effect on Sandy's total revenue. Their demand and cost will just offset each other. Unit elastic occurs when consumers have other options or substitutes to choose from. For instance, Sandy's customers were used to paying $2.00 for an oatmeal raisin cookie. However, as the price of their favorite cookie climbed to $2.50, some of them start thinking about buying a less costly cookie instead. For example, they may purchase a cookie that still costs $2.00 as a less expensive, but acceptable alternative.
Unit elastic represents a proportional change in the price and quantity demanded. For each increase in price, there is an equal decrease in the amount of units demanded. This change in demand happens because consumers have other options or substitutions to choose from that may be cheaper in price.
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Unit Elastic: Definition & Example
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