Will a monopoly firm ever operate on the inelastic portion of its demand curve? Watch

satisfactionatlast
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We had this question for homework. So my answer was:

"A monopoly would never operate on the inelastic portion of its demand curve." That so far is correct. However, the next part of the question explaining why is apparently wrong. I don't know why.

I said: "The reason is because if it did operate on the inelastic portion of its demand curve, then increasing price would increase revenue while decreasing quantity. Decreasing quantity would reduce costs. As a result, revenue go up and costs go down and the firm must not be profit maximizing."
Please can anyone explain to me why this is wrong? It makes perfect sense to me, but my teacher diagrees and says it's wrong. What would be the correct answer?
Thanks in advace
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cheeseandbiscuits
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The reason monopolies always operate where demand is elastic is because when demand is inelastic the firms will just continue to increase prices as their revenue will increase. So therefore it will only stop increasing prices where demand becomes elastic.
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chronicles
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(Original post by satisfactionatlast)
We had this question for homework. So my answer was:

"A monopoly would never operate on the inelastic portion of its demand curve." That so far is correct. However, the next part of the question explaining why is apparently wrong. I don't know why.

I said: "The reason is because if it did operate on the inelastic portion of its demand curve, then increasing price would increase revenue while decreasing quantity. Decreasing quantity would reduce costs. As a result, revenue go up and costs go down and the firm must not be profit maximizing."
Please can anyone explain to me why this is wrong? It makes perfect sense to me, but my teacher diagrees and says it's wrong. What would be the correct answer?
Thanks in advace
Hi there!

Okay erms firstly, its not that a monopoly would never produce on the inelastic portion of its demand curve. It is that a profit maximizing monopoly would not produce on the inelastic portion.

THis is because, when the demand curve is inelastic, a rise in quantity will lead to a relatively larger fall in price, and hence total revenue will actually fall.

I don't quite understand your answer, but it seems confused because for one, decreasing quantity will not necessarily reduce costs. You do not know how the cost curve is positioned.

Hope this helped. Quote me if you want clarification :yes:
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satisfactionatlast
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(Original post by chronicles)
Hi there!

Okay erms firstly, its not that a monopoly would never produce on the inelastic portion of its demand curve. It is that a profit maximizing monopoly would not produce on the inelastic portion.

THis is because, when the demand curve is inelastic, a rise in quantity will lead to a relatively larger fall in price, and hence total revenue will actually fall.

I don't quite understand your answer, but it seems confused because for one, decreasing quantity will not necessarily reduce costs. You do not know how the cost curve is positioned.

Hope this helped. Quote me if you want clarification :yes:
thanks (:, but you said: (italics)
why? I mean I don't get it. Quantity increases so prices decrease by a LARGE amount?
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satisfactionatlast
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(Original post by cheeseandbiscuits)
The reason monopolies always operate where demand is elastic is because when demand is inelastic the firms will just continue to increase prices as their revenue will increase. So therefore it will only stop increasing prices where demand becomes elastic.
thank you (:
but the question is why would the monopolies not operate on the inelastic portion of the curve? I don't really understand your answer. Can you please elaborate? (:
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chronicles
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(Original post by satisfactionatlast)
thanks (:, but you said: (italics)
why? I mean I don't get it. Quantity increases so prices decrease by a LARGE amount?
heya. You've got to get back to your demand-supply basics. When the demand curve is inelastic, a rise in quantity means a proportionally larger fall in price. THus revenue falls. THis is opposed to an elastic demand curve where a large rise in quantity means a small fall in price. Thus revenue rises.

Does that help any? Hope it does!
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xbabyxchelseax
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I thought an increase in price does not mean revenue increases, as revenue= price x quantity, so an increase in price would just lead to a fall in quantity... maybe im wrong
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satisfactionatlast
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(Original post by xbabyxchelseax)
I thought an increase in price does not mean revenue increases, as revenue= price x quantity, so an increase in price would just lead to a fall in quantity... maybe im wrong
Total revenue = Price times quantity
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satisfactionatlast
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(Original post by chronicles)
heya. You've got to get back to your demand-supply basics. When the demand curve is inelastic, a rise in quantity means a proportionally larger fall in price. THus revenue falls. THis is opposed to an elastic demand curve where a large rise in quantity means a small fall in price. Thus revenue rises.

Does that help any? Hope it does!
woops! guess after one year you forget simple things like that.
Okay let's take an inelastic good like salt for example.
NO MATTER what the PRICE is, people would still BUY it because it is a necessasity!
So my question is, WHY would producers LOWER the price, and as you said "larger fall in price" when they can charge it at a higer price? I mean quantity demanded would stay the same since it is an inelastic good!
thank you in advance
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danny111
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its got to do with MR and MC:

MC = MR (for profit maximising monopoly)

MC > 0

MR < 0 if you are on the inelatic portion of the Demand Curve (since MR = P(1 - 1/e) where e = (absolute value) elasticity

hence a profit-maximising monopoly cannot produce there.
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chronicles
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(Original post by satisfactionatlast)
woops! guess after one year you forget simple things like that.
Okay let's take an inelastic good like salt for example.
NO MATTER what the PRICE is, people would still BUY it because it is a necessasity!
So my question is, WHY would producers LOWER the price, and as you said "larger fall in price" when they can charge it at a higer price? I mean quantity demanded would stay the same since it is an inelastic good!
thank you in advance
Please be specific. salt isn't inelastic. It has an inelastic price demand. The price elasticity of supply is probably quite elastic in fact.

Your question now is not about elasticities anymore btw. You seem to be asking why there is no positive correlation between price and quantity. A supply curve is upward sloping, so there is a positive correlation and indeed, where there is an increase in Quantity, producers will want to charge a higher price.

However, the demand curve is downward sloping with negatively related price and quantity. So this complicates things.

Okay, firstly for an equilibrium price to change, there has to be a shift in demand or supply. If there is a rightward shift in supply, then the equilibrium quantity demanded will rise. (Draw this out if it helps). Now where a shift in supply is concerned, we have to look at the elasticity of the demand curve (and where a shift in demand is concerned, look at the elasticity of the supply curve).

Since the salt is has price inelastic demand, the rise in quantity caused by a shift of the supply curve will result in a relatively larger fall in price. Thus, revenue falls.
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Rooster523
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Monopoly will never work unless you pass go, fact.
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Keith_Dave
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(Original post by cheeseandbiscuits)
The reason monopolies always operate where demand is elastic is because when demand is inelastic the firms will just continue to increase prices as their revenue will increase. So therefore it will only stop increasing prices where demand becomes elastic.
Lol you're a gay.
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Vedikavini
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The marginal revenue is positive when the demand curve is elastic, it is zero when the demand curve is unit elastic and it becomes negative when the demand curve is inelastic.This is the answer to the question. Given that the marginal revenue is the amount of revenue gained by selling an extra unit, nobody is going to sell an extra unit if the marginal revenue is negative (ie they lose money by selling it).
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momal memon
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can any one please expain me this question. why monopoly firm will not produce inelastic range of the demand curve?
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