What is Unit Elastic?
How do people react when the price of a product goes up or down? What happens when incomes rise? What about when the supply of a product starts to slip? These questions all point to a concept in economics called elasticity.
Elasticity in economics is a measure of how much the demand for a good is affected by other variables such as supply, price, consumer options and income. The variables in economics can cause the elasticity of a good to change dramatically and disproportionately. Take the example of gas prices. When the price of gas goes down, people don't go out and buy a ton of gas beyond possibly filling their car's gas tank.
There are two important terms that help to explain the relationship between demand and other variables:
- Elasticity - When a good or service is elastic, its demand responds to changes in economic variables.
- Inelasticity - When a good or service is inelastic, its demand doesn't respond to economic variables.
So what is unit elastic mean then? The unit elastic definition in economics is when the goods's change in demand is directly related and proportional to the change in the corresponding variable. An example of this definition would be that when a product increases its price by 10% it will see a corresponding drop in demand of 10%. Unit price elastic is either an inverse or direct relationship:
There are two primary measures of unit elastic. One looks that the elasticity of supply and one looks at the elasticity of demand.
- Unit Elastic Demand - Unit elastic demand is when the demand for a product changes proportionally to the price. This relationship is inverse, meaning that when prices rise, demand drops and vice versa.
- Unit Elastic Supply - Unit elastic supply is when the quantity of supply of a good changes proportionally to the change in price of the good. This is a direct relationship because when the price of a good goes down, more people will buy the product and the supply will go down.
To calculate the elasticity of a good, simply take either the percentage change in supply or demand and divide it by the percentage change in price.
Unit Elastic Graph
The unit elastic graph shows the different ways the unit elastic supply curve and unit elastic demand curve relate to each other. Notice how each line acts opposite based on the change in price. When the price rises, the demand lowers, but the supply rises. The following two graphs show each unit elastic graph separately and then combined. For each graph, the example of the price of general household appliances will be used.
Unit Elastic Demand Curve
The unit elastic demand curve shows the inverse relationship between the quantity demanded of a product in relation to the price of a product. The graph below shows the demand for appliances based on a 15% drop in overall prices.
Unit Elastic Supply Curve
The unit elastic supply curve shows a direct relationship between the supply of a product in relation to its change in price. The following graph shows how the unit elastic supply curve matches the percentage rise in price.
Unit Elastic Examples
Unit elastic goods fall into a category of necessary goods, which means that they are important to most people's lives, but are not essential for survival. Products that see almost no change in demand are called essential goods. Since unit elastic goods are not essential, they have more elasticity. If the goods are not necessary, then they are classified as luxury goods which have a much higher elasticity and see a disproportional change in demand and supply based on a change in price. The following are unit elastic examples of goods.
- Household Appliances - Everything from small appliances, like toasters, to large appliances, like refrigerators, are considered unit elastic goods. They will see a drop in demand as the price increases and vice versa, but they stay very steady and proportional. Appliances are considered necessary because they are needed to cook and preserve food, but are not essential for survival.
- Basic Electronics - Cell phones, laptops, televisions, headphones and cameras also fall into the unitary elastic category. They are considered necessary products in the modern world and will see a proportionate change in demand and supply with a change in price. This category is unique because in the late 1990s and earlier, this category would have been way more elastic and fallen under the category of luxury goods.
- Clothing - It might seem erroneous to put clothing in a category that is not essential, but the assumption in a first-world economy is that most consumers already own the clothing they need to survive. The purchasing of new clothing that replaces current clothes is considered a necessary good and is usually unit elastic. For clothing to be in the unit elastic category, they have to be considered normal brands of clothing. Cheap, discount store clothes would not act the same and neither would ultra luxury clothing like Prada and Gucci. Normal clothing would be most of the brands that fall between cheap no-name and luxury. Brands like Old Navy, H&M and the Gap would be examples.
Elasticity is the measurement of how responsive the demand and supply of good or service is with a change in price. Other factors play into elasticity such as supply, price, consumer options and income.Good are either elastic, meaning the quantity of supply and demand changes with the price, or they are inelastic, which means the demand and supply don't change with the price. Unit elasticity occurs when the supply and demand of a product changes proportionally to the change in price. A price change of 10%, will see a corresponding change in supply and demand of 10%
Unit elastic supply is the measure of the proportional change in the current supply based on the change in price. They have a direct relationship, which means that a 10% increase in price will see a 10% increase in the quantity of supply. Unit elastic demand is the proportional change in the demand for a product based on a price change. They have an inverse relationship, so a 10% increase in price would lead to a 10% decrease in demand. Goods services that are unit elastic are in a category called necessary goods. Some examples of unit elastic products are household appliances, basic electronics and clothing.
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What is unit elastic example?
An example of a unit elastic good would be a change in the price of household appliances. If the overall price of household appliances fell by 10%, there would be a proportional increase in demand of 10% and a proportional decrease in supply of 10%
Which products are unit elastic?
Products that are unit elastic see a proportional change in demand and supply based on a change in price. These goods are called necessary goods because most consumers need them in their everyday life. They are elastic because while they are necessary, they are not essential.
How do you find unit elasticity?
Finding unit elasticity is done by using the elasticity formula. To calculate elasticity, take the percentage change in either demand or supply and divide it by the percent change in price. The resulting number is the goods elasticity value. If the number is equal to 1, then the good is unit elastic.
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