Question

If an existed dairy industry start new product line ( evaporated filled milk) and the market structural is monopolistic, how can i apply the managerial economic aspects and curve?(elasticity, when it gain it's revenue)..in short and long run

Answer 1

A monopoly seller will face a downward sloping demand curve. At the midpoint of the demand curve, demand is unit elastic, so that a N% rise (fall) in price will decrease (increase) quantity demanded by exactly N%. To the left of the midpoint, demand is elastic, so that a N% rise (fall) in price will decrease (increase) quantity demanded by more than N%. To the right of the midpoint, demand is inelastic, so that a N% rise (fall) in price will decrease (increase) quantity demanded by less than N%. A rational monopolist will never sell in the inelastic portion of demand curve, since in this range, an increase in quantity will result in a proportionately higher decrease in price, which means revenue will decrease.

As a result, when the monopolist operates in the unit elastic point, an increase (decrease) in price will lead to zero change in revenue. But when the monopolist operates in the elastic region, an increase (decrease) in price will lead to a decrease (increase) in revenue.

Finally, the monopoly firm should keep in mind that demand will be more inelastic in short run since consumers will have less time and lower number of substitutes to switch to, caused by an increase in price. But demand will be more elastic in long run since consumers will have more time and higher number of substitutes to switch to, caused by an increase in price. Therefore it is more profitable to keep price higher in short run but lower in long run, to increase revenue.