Can someone explain why a monopoly operates in the elastic section of the demand curve… and not the inelastic section
i know in the inelastic section price are lower… my guess is that because there are no alternatives they operate at the higher price in the elastic region… not so sure though
Don’t look at the elasticity of demand here. A monopoly wants to maximize profits and charges a price on the demand curve that is consistent with MR=MC. Hope that helps!
A monopoly will decrease price while in the elastic range b/c a decrease in price results in a proportionately larger increase in revenues. When it reaches the inelastic range, a further decrease in price would result in a proportionately smaller increase in revenue, so it doesn’t decrease price any further.
I thought I’d edit my last post as it was not very clear or rigorous: we know mc=mr for profit maximizing monopoly and we know mc>0 so we need the MR to be greater than zero. In other words if MR<0 we cannot possibly be at the correct production point. Now MR= (pq)’= p’q + q’p were ’ means derivative with respect to q, note p’q is the negative term, now because p and q are both >0 we can divide MR by their product, pq, and this will have the same sign as MR i.e. MR/pq is positive only where MR is positive. So: MR/pq= p’q / (pq) + q’p / (pq) =p’/p + q’/q call this eq. 1 This is now in a nice form for us to use the fact that elasticity of demand means, by definition, that q’/q > p’/p in terms of their magnitude i.e. ignoring the fact that p’/p is negative. So we have a positive q’/q which is bigger than the negative p’/p, so their sum must be positive. Now their sum is what we got in eq. 1 … yey we have shown MR>0 in the elastic region Also it is negative in the inelastic region as the negative p’/p is greater than the positive q’/q in the elastic region. This means that the point at which MR=MC must be in the elastic region for this is the only region where MR is positive, and since MC is always positive it is the only region where they can be equal. note it also cannot be the inelastic region as there MR=0 and MC is not 0.
Also remember that MR falls steeper than the demand curve since a change in P affects all goods sold (except if you do price discrimination). The point at which MR = 0 is also the point at which demand is unit elastic. A monopoly produces at MR = MC (MC is not 0) -> therefore Monopoly operates in the elastic section. Also: If a monoploly would produce in the inelastic region this would mean that charging a higher P would increase profits