What does unit elastic mean?

Unit elastic demand happens when the price elasticity is exactly 1. This means a 10% increase in price causes exactly a 10% decrease in quantity demanded. The percentage changes perfectly offset each other.

What is perfectly inelastic demand?

Perfectly inelastic demand occurs when the elasticity is exactly 0. This means consumers will buy the exact same amount of a good regardless of how high the price goes. The demand curve on a graph would be a vertical line.

How does elasticity affect a company's total revenue?

If demand is inelastic (consumers are not sensitive to price), raising the price will increase total revenue. If demand is elastic (consumers are very sensitive to price), raising the price will cause a large drop in sales, decreasing total revenue.

What is price elasticity of demand?

Price elasticity of demand is a measurement of how much the quantity demanded of a good changes when its price changes. It tells us whether shoppers are highly sensitive to a price hike or if they will keep buying roughly the same amount anyway. Think of an elastic band: if you pull it, it stretches a lot. If a product's demand is elastic, a small change in price causes a large stretch (or change) in the amount people buy. If it is inelastic, it is like a stiff piece of rope that barely stretches at all, meaning consumers buy almost the same amount regardless of a price change.

How to calculate it

To find the price elasticity of demand, economists use a specific formula. We divide the percentage change in quantity demanded by the percentage change in price. Mathematically, it looks like this: $E_d = \frac{\% \Delta Q_d}{\% \Delta P}$ . Because price and quantity demanded almost always move in opposite directions (due to the Law of Demand), this calculation usually results in a negative number. However, economists typically use the absolute value. If the result is greater than 1, demand is elastic. If it is less than 1, demand is inelastic.

Why it works

Elasticity depends on how consumers make choices. If a good has many close substitutes, like a specific brand of cereal, consumers will easily switch to another brand if the price goes up. This makes the demand highly elastic. On the other hand, if a good is a necessity with few substitutes, like a life-saving medication or gasoline for a daily commute, consumers are forced to pay the higher price, making the demand inelastic.

Where students slip up

A common mistake is using the simple percentage change formula instead of the Midpoint Method. If you calculate the percentage change from a starting price of $10 to$ 12, you get a 20% increase. But if the price drops from $12 to$ 10, it is a 16.6% decrease. To avoid different elasticity results for the same price range, economists use the Midpoint Method, which divides the change by the average of the starting and ending values: $\frac{Q_2 - Q_1}{(Q_2 + Q_1)/2} \div \frac{P_2 - P_1}{(P_2 + P_1)/2}$ .

Worked through

A local coffee shop raises the price of its signature latte from $4.00 to$ 6.00. As a result, the number of lattes sold per day drops from 200 to 100. Calculate the price elasticity of demand using the Midpoint Method.

First, find the percentage change in quantity demanded using the midpoint formula. The change in quantity is 100 - 200 = -100. The average quantity is (200 + 100) / 2 = 150. So, the percentage change in quantity is -100 / 150 = -0.667 (or -66.7%). Next, find the percentage change in price. The change in price is $6.00 -$ 4.00 = $2.00. The average price is ($ 4.00 + $6.00) / 2 =$ 5.00. So, the percentage change in price is 2 / 5 = 0.40 (or +40%). Finally, divide the percentage change in quantity by the percentage change in price: $E_d = \frac{-0.667}{0.40} = -1.667$ . Taking the absolute value, the price elasticity of demand is 1.67. Since 1.67 is greater than 1, the demand for these lattes is elastic.

Questions students ask

Ask about this topic

Explain at

Where this comes from: OpenStax Principles of Microeconomics: Elasticity · Khan Academy Microeconomics: Price elasticity of demand