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Define elastic, inelastic, and unitary elasticity

Economics

Define elastic, inelastic, and unitary elasticity. How are these related to total revenue?

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The amount of the slope of the downward-sloping demand curve is related to the concept of elasticity. A nearly vertical curve means demand is inelastic, or there is not much response in quantity demanded when the price changes. The coefficient of elasticity is less than 1. A nearly horizontal curve means demand is elastic, and there is a strong response in quantity to a change in price. The coefficient of elasticity is more than 1. Unitary elasticity means that the coefficient of elasticity is exactly 1.

Another way to think about elasticity is in terms of total revenue. Here are the rules:

  • If demand is elastic, the price change and the total revenue will move in opposite directions. That means that a small increase in price will cause a large decrease in total revenue.
  • If demand is inelastic, the price change and total revenue will move in the same direction. If you raise the price, people will keep buying, and there will be more revenue.
  • If demand is unit elastic, the total revenue will stay the same. The amount of revenue you lose because people walk away and don't buy is exactly equal to the extra revenue from the customers who stay and pay more.