Economics Elasticity Of Demand Questions Medium
The concept of elasticity of demand in relation to monopoly power refers to the responsiveness of consumer demand to changes in price when a market is dominated by a single seller or a monopoly. Elasticity of demand measures how sensitive the quantity demanded is to changes in price.
In a monopoly, the firm has the power to set prices without facing significant competition. This means that the firm can increase or decrease prices without losing a significant number of customers. However, the elasticity of demand plays a crucial role in determining the extent to which a monopoly can exercise its market power.
If the demand for a monopoly's product is relatively elastic, it means that consumers are highly responsive to changes in price. In this case, if the monopoly increases its price, the quantity demanded will decrease significantly, resulting in a large loss of revenue for the firm. Conversely, if the monopoly lowers its price, the quantity demanded will increase substantially, leading to a significant increase in revenue.
On the other hand, if the demand for a monopoly's product is relatively inelastic, it means that consumers are not very responsive to changes in price. In this scenario, the monopoly can increase its price without experiencing a significant decrease in the quantity demanded. Similarly, if the monopoly lowers its price, the increase in quantity demanded may not be substantial enough to offset the decrease in price, resulting in a smaller increase in revenue.
Therefore, the concept of elasticity of demand is crucial in understanding the extent to which a monopoly can exercise its market power. A monopoly with a relatively elastic demand will have less control over pricing and may face more competition from substitute products. Conversely, a monopoly with a relatively inelastic demand will have more control over pricing and face less competition, allowing it to exercise greater market power.