ANSWER

In economics, elasticity refers to the responsiveness of the quantity demanded or supplied of a good to a change in its price. Elasticity can be classified into three categories: elastic, unitary, and inelastic.

Elastic Demand: If the demand for a product is elastic, it means that a small change in price will lead to a relatively larger change in the quantity demanded. The elasticity of demand is greater than 1 (in absolute value).

Unitary Demand: Unitary demand occurs when a change in price results in an exactly proportional change in the quantity demanded. The elasticity of demand is exactly 1.

Inelastic Demand: In the case of inelastic demand, a change in price leads to a relatively smaller change in the quantity demanded. The elasticity of demand is less than 1 (in absolute value).

Now, let’s connect this to a monopolist’s pricing decision and marginal revenue (MR) curve:

A monopolist is a single seller in the market and has the ability to set the price of the product. However, unlike in a competitive market, a monopolist faces a downward-sloping demand curve, meaning they can’t simply increase the quantity sold by lowering the price, because the lower price applies to all units sold. This is why the monopolist’s marginal revenue curve lies below the demand curve.

Key points:

Elastic Demand and Monopoly Pricing: If the demand for a monopolist’s product is elastic, it means that consumers are sensitive to price changes. If the monopolist raises the price, the quantity demanded will drop significantly, potentially leading to a decrease in total revenue. In such cases, the monopolist should avoid raising the price too much to prevent a substantial loss in revenue.

Inelastic Demand and Monopoly Pricing: If the demand is inelastic, consumers are not very responsive to price changes. The monopolist has more pricing power and can potentially increase the price without experiencing a significant drop in quantity demanded. This can lead to higher total revenue for the monopolist.

Unitary Demand and Monopoly Pricing: If the demand is unitary elastic, any change in price will lead to an exactly proportional change in revenue. The monopolist needs to carefully consider how changes in price might impact overall revenue.

Example:
Let’s say a monopolist is selling a prescription medication for a rare medical condition. Due to the rarity of the condition and the lack of close substitutes, the demand for the medication is inelastic. If the monopolist increases the price slightly, the quantity demanded won’t decrease significantly, and the total revenue might increase. However, if they were to drastically increase the price, the quantity demanded could drop more substantially, leading to a decrease in total revenue.

Remember, the marginal revenue curve of a monopolist intersects the x-axis where MR = 0, and it becomes negative beyond that point. This means the monopolist cannot operate on the downward-sloping portion of the demand curve beyond this point because any increase in quantity would lead to a decrease in total revenue.

In summary, a monopolist’s pricing decision is influenced by the elasticity of demand. Elastic demand suggests caution in raising prices, while inelastic demand provides more flexibility in pricing decisions. The behavior of the marginal revenue curve guides the monopolist’s pricing strategy to ensure positive total revenue.

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