What Is Unitary Elasticity?
In the field of economics, the term “unitary elasticity” refers to a situation in which a shift in one factor leads to a proportional or equal shift in another factor, leaving original outcomes in place. This is particularly important with regard to the setting of prices; when unitary elasticity is at work in a market, it is impossible to change revenues by changing the unit price.
Consider a situation in which milk costs $2.50 per gallon. A grocer notices that he is not selling as much milk as he would like, so he puts the milk on sale, dropping the price to $1.25 a gallon. With unitary elasticity, the number of sales would double because the price was cut in half. So if the grocer would sell 100 gallon jugs of milk at $2.50, that would lead to revenues of $250. Cutting the price to $1.25 would then yield sales of 200 gallons, still leading to revenues of $250. If a milk shortage hits and the grocer hiked the price up to $5 per gallon, he would only sell 50 gallons because unitary elasticity means that the grocer would still only bring in $250. In real-world situations, unitary elasticity almost never takes place.