Question

  Is the deadweight loss that results from a monopoly likely to be relatively large or relatively small. Use the concept of elasticity to explain your answer.

Answer 1

Deadweight loss in case of monopolies occur due to existence of inefficiencies ie monopoly is an inefficient market due to the fact that since there is no competition , we do not have more of innovations or incentive to compete and perform better.

we see that the extyent to which monopoly can benefit depends on the flexibilty or elasticity of the demand curve ie if we have a steeper demand curve ie the it is relatively inelastic , then the price can be changed without affecting the quanitity much. but when the elasticity is more, a small change in the price would result in a more change in quantity.

when demand is relatively more elastic it is seen that the deadweight loss is more and in case when the demand is inelastic we find that the deadweight loss is less because there is certainly less change in the behaviour of consumer when we have the inelastic demand .

Though the effect of deadweight loss is certainly ambigious in case of monopoly because largely it depends on the shape of demand curve .