Unit Elasticity

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Definition of Unit Elasticity:

Unit elasticity occurs when the elasticity of demand equals one. An increase in price will not result in a change in revenues because the increase in revenues from the sale of a good will be offset by a reduction in the quantity demanded. 

Detailed Explanation:

The law of demand tells us that if the price of a good is increased, the quantity demanded of that good must decrease. For business managers, relevant questions are "What will happen to our revenues if we raise our price?". "Will the increase in price be offset by the drop in the number of items sold?" Every demand curve has a point of unit elasticity, where the elasticity of demand equals one. This is the point where a price change would not change total revenue. Any gain in revenue from increasing the price would be offset by the loss in revenue from the reduction in quantity demanded. In other words where the price elasticity is one, the percentage increase in price yields the same percentage decrease in the quantity demanded.

Dig Deeper With These Free Lessons:

Price Elasticity of Demand - How Much of a Price Change Would You Tolerate
Demand - The Consumer's Perspective
Supply and Demand - Consumers and Producers Reach Agreement

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