Elastic, unitary and inelastic refer to the price elasticity of demand, a calculation that determines how price sensitive the market is for specific goods. The relationship between price and demand determines whether the demand for the product is described as elastic, inelastic or unitary. Inevitably, some products are more price sensitive than others.
When a change in demand is greater than the change in price, the demand for the product or good is said to be elastic. When a product is elastic, slight changes in price lead to huge changes in the demand for the product. Many goods and services that not necessity items are usually highly elastic. To determine the elasticity of the demand for a product, the percent change in quantity is divided by the percent change in price. When this equation is calculated, the answer reveals a product’s elasticity. If the answer to the equation is equal to or greater than one, the product is considered elastic.
Inelastic refers to the change in demand being less than the change in price on the product or good. Inelastic products are typically those people consider necessities. Changes in price do not change the demand for the product very much. When the elasticity equation is calculated, goods that are considered inelastic have an answer that is less than one.
Goods that are considered unitary in terms of elasticity are goods that have no change in demand when prices change. There are few goods ever considered unitary, but products such as medicine or utilities can sometimes reach this point. No matter the prices charged, people find a way to purchase the goods, regardless. Companies selling goods that are unitary often make large profits because people consider these goods a necessity above all other goods.
Factors Determining Elasticity
The elasticity of goods is controlled by three main factors. The availability of substitutes is the first factor. Goods that can be substituted easily tend to be more elastic. For example, if the price of donuts goes up significantly, people may start purchasing danishes instead. Therefore, the demand for donuts decreases significantly because people are substituting danishes for donuts. The amount of income available to spend is another factor. When a person’s income remains the same and an item they regularly purchase doubles in price, the person may no longer be able to afford to purchase the item. Timing is the last factor. Cigarettes are an obvious example. People may continue to smoke even if the price per pack of cigarettes rises 100 percent. The person may gradually cut back and eventually quit because of the price.
Example of Price Elasticity of Demand
The price elasticity of demand is calculated by dividing the percent change in the quantity demanded by the percent change in its price. Companies collect data on consumer response to product price changes and use the information to set their prices accordingly to maximize their profits from that product.
For example, a company decreases its price for a box of fabric softener sheets from $4 to $3 and demand for the product increases from 100 boxes to 110 boxes. The price elasticity of demand is calculated by dividing the 10 percent increase in demand (100 ÷ 10) by the 25 percent price decrease ($1.00 ÷ $4.00), producing a value of 0.4. Demand elasticity less than a value of 1 indicates inelasticity. Decreasing the price of the softener will result in only a small increase in demand. If demand elasticity is greater than a value of 1 it is elastic which means it reacts proportionately to higher changes in economic factors. Reducing the price in this example will produce smaller revenues than if it were elastic.