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

In comparison to other market structures the demand function faced by a monopolist is relatively price inelastic. This is because there are no substitutes available for the product and there are no sellers from whom the consumers can purchase besides the monopolist.

The deadweight loss depends upon the elasticity of demand. Because marginal cost for a monopolist or even for a monopolistically competitive firm are more or less u shaped, it is the demand function that is responsible for increasing or decreasing the dead weight loss.

When the demand is inelastic as in the case of a monopoly, the reduction in the quantity from competitive equilibrium perspective, is quite low and the price increase is quite high. This indicates that the deadweight loss for a monopoly is quite low in comparison to other marketing structure. The deadweight loss is basically the area that lies between competitive output and monopolist output.