Definition: A unitary elasticity is found when a unitary change in one element causes a unitary change in the other element. In other words, the value of both elements increases and decreases on an equally proportional basis.
What Does Unit Elastic Mean?
When analyzing a given good or service elasticity it is possible to get a unitary elasticity. This means that the item has an elasticity ratio of 1. In economics, elasticity is used to evaluate the degree of change that the supplied or demanded quantities of an item experience if the price of the item is changed. The higher the elasticity ratio the more sensible these quantities are to any change in the price.
If a given product or service is considered unit elastic it will mean that a percentage change on the price will be equally reflected in a percentage change in the quantities (demanded or supplied).
This concept is particularly useful for price-setting decisions. Whenever a company is pursuing a campaign to increase profitability or production volumes by affecting the current price of the items they sell, the company must assess the elasticity of each item to understand what would be the most probable reaction of the market to these changes and conclude if the expected results would be possible.
Here’s a brief example of this concept.
Example
All Brushes Co. is a company that manufactures disposable tooth brushes for hotels. These brushes are very cheap and hotels are always looking for the cheapest options in the market. The profitability of All Brushes has been decreasing and the company is analyzing the impact of increasing prices. The company’s financial analysts concluded that each 10% of increase in price will reduce the demanded quantities by 10%. Is this a situation of unitary elasticity?
According to our concept, a good is considered unit elastic when a unitary change in one element causes a unitary change in the other. As we see, a 10% change in price will reduce the demand by 10%, which also means that a 1% change in price will reduce demand by 1%. This means that the brushes are unit elastic.
