Elasticity of Demand and Marginal Revenue in Monopoly

In a monopoly market, there is a single seller or producer who has complete control over the supply of a particular product or service. This gives the monopolist the ability to set prices and quantities in order to maximize their profits. Understanding the relationship between elasticity of demand and marginal revenue is crucial in determining the monopolist's pricing and production decisions.

Elasticity of Demand

Elasticity of demand measures the responsiveness of quantity demanded to changes in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.

If the elasticity of demand is less than one (inelastic demand), it means that changes in price have a relatively small impact on quantity demanded. In this case, a monopolist can increase prices without experiencing a significant decrease in demand. On the other hand, if the elasticity of demand is greater than one (elastic demand), it means that changes in price have a relatively large impact on quantity demanded. In this case, a monopolist must be more cautious in setting prices, as small price increases can lead to significant decreases in demand.

Marginal Revenue

Marginal revenue (MR) is the additional revenue a firm earns when it sells one more unit of output. In a perfectly competitive market, marginal revenue is equal to the market price, as firms are price takers and can sell as much as they want at the prevailing market price. However, in a monopoly market, the monopolist faces a downward-sloping demand curve and must lower the price in order to sell more units. As a result, marginal revenue is less than the price for each additional unit sold.

Elasticity of Demand = 1 in Monopoly

When the elasticity of demand is equal to one in a monopoly market, it means that the percentage change in quantity demanded is equal to the percentage change in price. This is known as unitary elasticity of demand.

In this case, the monopolist can increase the price, but the decrease in quantity demanded will be proportional to the increase in price, resulting in constant total revenue. The monopolist does not have the ability to increase total revenue by adjusting the price, as any increase in price will lead to an equal decrease in quantity demanded.

Marginal Revenue = Zero

When elasticity of demand is equal to one in a monopoly market, marginal revenue will be zero. This is because the monopolist is unable to increase total revenue by adjusting the price. As a result, the additional revenue from selling one more unit of output is zero.

In conclusion, when elasticity of demand is equal to one in a monopoly market, the monopolist faces unitary elasticity and marginal revenue is zero. This has important implications for the monopolist's pricing and production decisions, as they are unable to increase total revenue by adjusting the price.