Elasticity of Demand and Marginal Revenue in Monopoly

Elasticity of demand refers to the responsiveness of consumers to changes in prices. If the demand for a product is elastic, a small change in price will lead to a significant change in the quantity demanded. On the other hand, if the demand is inelastic, a change in price will have little effect on the quantity demanded.

Marginal revenue, on the other hand, refers to the additional revenue a firm earns when it sells one additional unit of a product. In a monopoly, the marginal revenue curve is downward sloping because the firm must lower its price to sell more units.

When Elasticity of Demand is Equal to One in Monopoly

When the elasticity of demand is equal to one in a monopoly, it is referred to as unit elastic demand. This means that the percentage change in price is equal to the percentage change in quantity demanded. Mathematically, it can be expressed as:

% change in quantity demanded / % change in price = 1

In this case, the demand curve is a rectangular hyperbola, and the marginal revenue curve is a straight line that intersects the x-axis at the midpoint of the demand curve.

When the elasticity of demand is equal to one in a monopoly, marginal revenue will be zero. This is because the firm cannot increase its revenue by changing the price. If it raises the price, it will lose customers, and if it lowers the price, it will not gain enough customers to compensate for the lower price. Therefore, the firm will maximize its profits by producing the quantity at which marginal cost equals zero.

Conclusion

In conclusion, when the elasticity of demand is equal to one in a monopoly, the marginal revenue will be zero. This implies that the firm cannot increase its revenue by altering the price, and it will maximize its profits by producing the quantity at which marginal cost equals zero.