Marginal revenue is less than price. Marginal revenue is related to the price elasticity of demand — the responsiveness of quantity demanded to a change in price. When marginal revenue is positive, demand is elastic; and when marginal revenue is negative, demand is inelastic.
Would a monopolist ever operate in the inelastic portion of the demand curve it faces?
A profit maximizing monopoly will never produce in the lower half of the demand (AR) curve where demand is price inelastic.
What happens when elasticity equals 1?
If the number is equal to 1, elasticity of demand is unitary. In other words, quantity changes at the same rate as price. Elasticity of demand is illustrated in Figure 1. Note that a change in price results in a large change in quantity demanded.
Why is marginal revenue positive when demand is elastic?
Increases in consumer’s responsiveness to small changes in prices leads represents an elastic demand curve (e>1), resulting in a positive marginal revenue (MR) under monopoly competition. This signifies that a percentage change in quantity outweighs the percentage change in price.
Why do monopolists only produce where demand is elastic?
So, at the output Q, price and output cannot be fixed because of demand is unitary elastic. It shows that as marginal cost is always positive, monopoly equilibrium is possible only at that stage where demand is elastic. Equilibrium is not possible at Q on MC1 curve (MR=0) or at R on MC2 (negative marginal revenue).
Is marginal revenue negative or zero?
Marginal revenue can be zero and can be negative as well, for a firm with some market power.
What does an elasticity of 0.5 mean?
Demand for a good is said to be elastic when the elasticity is greater than one. A good with an elasticity of -2 has elastic demand because quantity falls twice as much as the price increase; an elasticity of -0.5 indicates inelastic demand because the quantity response is half the price increase.
Is the demand curve of a monopoly elastic?
It is that a profit maximizing monopoly would not produce on the inelastic portion. THis is because, when the demand curve is inelastic, a rise in quantity will lead to a relatively larger fall in price, and hence total revenue will actually fall.
What happens to marginal revenue when the demand curve is inelastic?
Notice how the marginal revenue is positive when the demand curve is elastic, it is zero when the demand curve is unit elastic and it becomes negative when the demand curve is inelastic. This is the answer to the question.
What is the elasticity of a demand function?
With this demand function, , so the elasticity at different points will be Notice that at point c, the mid point of the curve, the elasticity is -1, this is where the curve is unit elastic. Above point c, the curve is elastic, it gets more elastic the higher the price and lower the quantity.
Can a firm be in equilibrium with its demand curve?
As a result, as p rises, the firm’s profit would also rise. Therefore, at any point like R’ on the demand curve, the profit-maximising firm would increase the price of its product and move upward towards left along its demand curve. So the firm cannot be in equilibrium at a point on its demand curve where e < 1.
