What does a price elasticity of demand equal to 1 indicate?

A price elasticity of demand equal to 1 signifies unit elastic demand. This means that the percentage change in quantity demanded is exactly equal to the percentage change in price. When the price of a good increases by a certain percentage, the quantity demanded decreases by the same percentage, leading to no change in total revenue from sales. This situation reflects a balanced responsiveness of consumers; they are neither overly sensitive nor insensitive to price changes.

In the context of elasticity:

• Perfectly elastic demand indicates that even a tiny increase in price would cause the quantity demanded to fall to zero, which is not the case here.
• Perfectly inelastic demand suggests that quantity demanded does not change regardless of price variation, contrary to the nature of unit elastic demand where quantity does change in response to price.
• Highly elastic demand implies a greater sensitivity to price changes where the percentage change in quantity demanded exceeds the percentage change in price.

Thus, a price elasticity of 1 distinctly characterizes unit elastic demand, demonstrating an equilibrium in responsiveness between price changes and quantity demanded.