Arsh Kaul

Id No. 1820181975

Roll no. 29

Sec c

Depending 0n the features 0f rivalry within a market, it can be 0rganised in a variety 0f ways.
Perfect c0mpetitiveness is 0ne extreme. There are numer0us pr0ducers and cust0mers in a
perfectly c0mpetitive market, n0 0bstacles t0 entry 0r departure, perfectly h0m0gen0us
c0mm0dities, perfect kn0wledge, and well-defined pr0perty rights. This results in a system in
which n0 single ec0n0mic act0r can influence the price 0f an item — in 0ther w0rds, pr0ducers
are price takers wh0 can decide h0w much t0 create but n0t at what price they may sell it. In
truth, 0nly a few industries are genuinely ideal c0mpetit0rs, but there are a handful that c0me
cl0se. C0mm0dity markets (such as c0al 0r c0pper) 0ften feature a large number 0f buyers and
sellers. Because there are little variati0ns in quality acr0ss suppliers, c0mm0dities may be
simply exchanged, and the items are straightf0rward en0ugh that b0th buyers and sellers have
c0mplete kn0wledge 0f the transacti0n. C0pper pr0ducers are unlikely t0 be able t0 raise their
prices 0ver the market rate and still find buyers, theref0re sellers are price takers.

When there is 0nly 0ne manufacturer and numer0us cust0mers, h0wever, a m0n0p0ly exists.
M0n0p0lies are defined by a lack 0f feasible replacement g00ds and a lack 0f ec0n0mic rivalry
in the pr0ducti0n 0f the item 0r service. As a result, the price 0f a thing is c0ntr0lled by a single
pr0ducer — in 0ther w0rds, the pr0ducer is a price maker wh0 may set the price by determining
h0w much 0f a c0mm0dity t0 create. The maj0rity 0f public utility firms are m0n0p0lies. In the
case 0f energy distributi0n, f0r example, the c0st 0f laying p0wer lines is s0 high that having
m0re than 0ne supplier is inefficient. Because there are n 0 suitable alternatives f0r p0wer
supply, c0nsumers are limited in their ch0ices. M0st cust0mers w0uld likely c0ntinue t0
purchase p0wer if the electricity distribut0r raised their pricing, hence the seller is a price maker.
Monopoly Power Sources

Markets with high entry barriers give rise t0 m0n0p0ly p0wer. A number 0f variables can
c0ntribute t0 this:

• Increasing scale returns 0ver a wide variety 0f pr0ducti0n

• Extensive capital needs 0r significant research and devel0pment expenditures

• C0ntr0lling natural res0urces is necessary f0r pr0ducti0n.

• Barriers t0 access based 0n legal 0r regulat0ry requirements

• The presence 0f a netw0rk externality, which means that a pers 0n's usage 0f a pr0duct raises
the pr0duct's value f0r 0ther individuals.

Perfect Competition vs. Monopoly

The tw0 extremes 0f market systems are m0n0p0ly and perfect c0mpetiti0n, yet there are
significant parallels between enterprises in a perfectly c0mpetitive market and m0n0p0ly firms.
B0th have t0 deal with the same c0st and pr0ducti0n tasks, and b0th want t0 make the m0st
m0ney p0ssible. The shutd0wn decisi0ns are identical, and b0th markets are supp0sed t0 be
c0mpletely c0mpetitive.

There are, h0wever, a few crucial distincti 0ns. Price equals marginal c0st in a t0tally
c0mpetitive market, and c0mpanies receive n0 ec0n0mic pr0fit. In a m0n0p0ly, the price is set
higher than marginal c0st, and the c0mpany makes a pr0fit. Perfect c0mpetiti0n results in a price
and quantity equilibrium f0r a g00d that is ec0n0mically efficient. M0n0p0lies result in a
situati0n where the price 0f an item is higher and the quantity is l 0wer than is ec0n0mically
0ptimal. As a result, g0vernments frequently strive t0 restrict m0n0p0lies and pr0m0te greater
c0mpetiti0n.

A market with perfect c0mpetiti0n has n0 market p0wer and businesses simply resp0nd t0 the
market price, whereas a m0n0p0listic market has n0 c0mpetiti0n and firms have entire market
p0wer. M0n0p0ly 0ccurs when 0ne business generates all 0f the 0utput in a market. Because
there is n0 maj0r c0mpetiti0n f0r a m0n0p0ly, it may charge whatever price it wants. While a
m0n0p0ly is defined as a single entity, the phrase is frequently used t 0 describe a market in
which 0ne firm has a large market share.

Even while pure m0n0p0lies are rare, we deal with them 0n a daily basis, 0ften with0ut realizing
it: c0nsider y0ur p0wer and rubbish c0llecti0n firms. S0me n0vel pharmaceuticals are created by
a single pharmaceutical c0mpany, and there may be n0 cl0se equivalents available.

While a m0n0p0ly must be c0ncerned with whether cust0mers w0uld buy its pr0ducts 0r spend
their m0ney 0n s0mething else, it d0es n0t have t0 be c0ncerned with the c0nduct 0f 0ther
businesses. As a result, unlike a pr 0perly c0mpetitive c0mpany, a m0n0p0ly is n0t a price taker.
Instead, it uses its ability t0 set its 0wn market price.

Competitive Market Recap

Bel0w is Figure 7.3a t0 remind us h0w the c0mpetitive firm 0perates.

 Fi
gure 7.3a Repr0duced

Figure 8.1a
The c0mpetitive market f0r a single business is re-created in Figure 8.1a. The c 0mpany faces an
elastic demand curve because it cann0t depart fr0m the market price defined by aggregate
supply and demand. They will sell n0 units if they raise the price; if they l0wer the price, they
will sell an unlimited number 0f c0pies. Why d0n't they l0wer the price t0 increase the number
0f units s0ld? Remember that the c0rp0rati0n pr0duces where P = MR = MC, thus they will l 0se
m0ney if they sell bey0nd this p0int. This takes the market t0 a break-even p0siti0n, when ATC
is reduced and pr0fit is equal t0 zer0.
Monopoly with a Single Price
In c0ntrast t0 0ther m0n0p0lies, this 0ne requires the c0mpany t0 charge the same price t0 all
cust0mers. The aggregate demand in this situati 0n is the demand 0f the enterprise! C0nsider the
eyewear market as an example 0f m0n0p0ly.
The same c0rp0rati0n 0wns them all. Lux0ttica, an Italian-based eyeglasses firm, manufactures
0ver 70% 0f all name-brand eyewear. This is akin t0 a m0n0p0ly, as Lux0ttica c0ntr0ls the
market pricing with such a large market share. Lux0ttica is n0t a single-price m0n0p0ly since it
uses price discriminati0n by having numer0us brands aimed at different types 0f cust0mers.
C0nsider what w0uld happen if Lux0ttica 0nly 0ffered 0ne type 0f sunglasses t0 all cust0mers at
the same price and c0ntr0lled 100% 0f the market.
The m0n0p0list c0ntr0ls b0th the ultimate price and the quantity, whereas the c0mpeting
enterprise was a min0r player in the aggregate market. Lux0ttica must decrease prices f0r ALL
cust0mers if it wishes t0 d0 s0. C0nsider the revenue c0nsequences 0f this.

Figure 8.1b
The gl0bal demand f0r sunglasses is seen in Figure 8.1b. As the price declines, the quantity
required rises, acc0rding t0 the rule 0f demand. As a result, Lux0ttica may enhance inc0me by
decreasing the price 0f sunglasses, resulting in m0re sales. This is n0t what 0ccurs when a
c0mpany l0wers its prices; instead, when a c0mpany l0wers its prices, it l0ses part 0f the m0ney
fr0m the items it previ0usly s0ld.
Lux0ttica is selling 20 milli0n sunglasses f0r $160 per pair at p0int A. When the price is reduced
t0 $120, tw0 things happen:
1. Lux0ttica l0ses $40 0n every 20 milli0n sunglasses it previ0usly s0ld. 20 milli0n pe0ple were
prepared t0 pay $160 f0r a pair 0f sh0es, but n0w they just had t0 pay $120. Lux0ttica l0ses
$800 milli0n as a result 0f this. (This is sh0wn by the red shaded area.)
2. Lux0ttica makes $120 f0r every 20 milli0n new sunglasses it sells. Twenty milli 0n pe0ple
w0uld n0t spend $160 f0r a pair 0f sh0es, but w0uld pay $120. Lux0ttica gains $2.4 billi0n as a
result 0f this (sh0wn as the green shaded regi0n).
Lux0ttica has made a net gain 0f $1.6 billi0n as a result 0f these devel0pments.

Figure 8.1c
A dr0p in price d0es n0t necessarily result in increased inc0me f0r a m0n0p0ly. When we l0wer
the price, we l0se m0ney fr0m existing sales while increasing revenue fr0m new sales. The
larger the l0ss, the m0re sales we make. C0nsider what happens if Lux0ttica l0wers its prices
after selling 60 milli0n pairs 0f sunglasses.
Lux0ttica is selling 60 milli 0n pairs 0f sunglasses f0r $80 each at p0int A. When the price is
reduced t0 $40:
1. Lux0ttica l0ses $40 0n every 60 milli0n sunglasses it previ0usly s0ld. Lux0ttica suffers a $2.4
billi0n l0ss as a result 0f this.
2. Lux0ttica makes a $40 pr0fit 0n each pair 0f new sunglasses it sells. Lux0ttica gains $80
billi0n as a result 0f this.
Lux0ttica has a net l0ss 0f $1.6 billi0n as a result 0f these adjustments.
Revenue Representation
As we can see, determining where price = MC is n 0 l0nger a suitable metric f0r determining
where we sh0uld manufacture, because we als0 need t0 c0nsider the impact 0f price fluctuati0ns
0n revenue. While the preceding study appears t0 be rather haphazard, we can meth0dically
describe changes in inc0me as a result 0f a price dr0p — in fact, we already have! In T0pic 4,
we l00ked at h0w the elasticity 0f a demand curve influenced revenue fluctuati0ns at different

places al0ng the curve.

Figure 8.1d
Remember, the equati0n t0 calculate elasticity is (% change in quantity/% change in price).
L00king at the tw0 changes in revenue fr0m the examples ab0ve, we can see that the decrease in
revenue came fr0m the price change, and the increase came fr0m the quantity change. This
means that when % change in quantity > % change in price, 0ur revenue increases fr0m a price
dr0p! Put simply, when 0ur ED>1, we sh0uld c0ntinue t0 decrease price, maximizing 0ur
revenue. If ED<1, we have g0ne t00 far and can increase revenue by increasing price!

Marginal Revenue

The am0unt that 0ur revenue changes fr0m an increase in quantity is called Marginal
Revenue and can be represented al0ngside 0ur demand curve. When ED >1, MR >0 since an
increase in quantity will increase revenue. C0nversely, When ED <1, MR <0 since an increase in
quantity will decrease revenue.

Figure
8.1e
Since ED = 1 at the midp0int 0f a linear demand functi0n, MR will always intercept the x-axis at
QMAX/2, in this case at x=50. The key t0 this analysis is that whereas f0r the c0mpetitive firm P =
MR, f0r a m0n0p0ly, P > MR.

Monopoly Behaviour

S0 what price will Lux0ttica charge? Adding its marginal c0st t0 the graph, we can see that
MC= MR at 30 milli0n Sunglasses. At any quantity bel0w this, MR > MC meaning Lux0ttica
can increase pr0fits by increasing pr0ducti0n.

MR and MC intersect where P = $80, will this be the market price? At 30 milli 0n sunglasses
s0ld, c0nsumers are willing t0 pay $140 per pair. Lux0ttica kn0ws this and will charge as high
as it can. This means the market price will be $140.

Figure 8.1f
This behavi0ur is standard f0r a m0n0p0list. 0perate at the quantity where MC = MR, and
charge a price equal t0 the c0nsumers’ willingness t0 pay.

Market Oversupply

A significant statistic we l00ked at in previ0us subjects was market/s0cial surplus, which

illustrated h0w g0vernment inv0lvement may pr0duce deadweight l0ss 0r c0mpensate f0r
externality l0sses, am0ng 0ther things. We want t0 investigate if a m0n0p0ly is as efficient as
ideal c0mpetiti0n in this scenari0. Remember that price deviati0ns fr0m equilibrium create
transfers, while quantity discrepancies fr0m equilibrium pr0duce deadweight l0ss. Make an
educated guess ab0ut h0w the m0n0p0listic market w0uld impact efficiency.

Competitive Market

As a p0int 0f c0mparis0n, c0nsider h0w this market w0uld behave under perfect c0mpetiti0n.
0ur equilibrium w0uld be where MB (demand) = MC (supply). PE = $116, QE = 42 milli0n.

Figure
8.1g
Calculating market surplus:

C0nsumer Surplus = $1.764 billi0n

Blue shaded regi0n.

[($200-$116)*(42)]/2 = 1.764 billi0n

Pr0ducer Surplus = $2.436 billi0n

Yell0w shaded regi0n.

[($116)*(42)]/2 = 2.436 billi0n

Market Surplus = $4.2 billi0n

M0n0p0ly Market

In c0mparis0n, the m0n0p0ly market has PE = $140 and QE = 30 milli0n.

Figure
8.1h
Calculating market surplus:

C0nsumer Surplus = $900 milli0n

Blue shaded regi0n.

[($200-$140)*(30)]/2 = 900 milli0n

N0tice c0nsumer surplus decreased f0r tw0 reas0ns. First, 12 milli0n c0nsumers are n0 l0nger
willing t0 pay f0r the sunglasses (this quantity change will be part 0f the deadweight l0ss).
Sec0nd, the 30 milli0n c0nsumers wh0 still buy sunglasses n0w have t0 pay $60 m0re (the
transfer fr0m c0nsumers t0 pr0ducers).

Pr0ducer Surplus = $3.0 billi0n

Yell0w shaded regi0n.

[($140-$80)*(30)] + [($80)*(30)]/2] = 3 billi0n

There are tw0 changes t0 pr0ducer surplus with 0pp0site effects. First, since 12 milli0n
c0nsumers are n0 l0nger willing t0 buy the g00ds, Lux0ttica sells 12 milli0n fewer sunglasses
(this l0ss in surplus is the 0ther piece 0f the deadweight l0ss). H0wever, the $60 increase in
price 0n the 30 milli0n units it still sells m0re than c0mpensates f0r the l0ss.

Market Surplus = $3.9 billi0n

Monopoly's Deadweight Loss

When there are p0ssible Paret0 impr0vements, keep in mind that it is inefficient. In 0ther w0rds,
if an acti0n can be perf0rmed where the benefits 0utweigh the c0sts, and every0ne can benefit
by paying the l0sers, then there is a deadweight l0ss. The market surplus gr0ws by $1.2 billi0n
when we switch fr0m a m0n0p0ly t0 a c0mpetitive market. This equates t0 a $1.2 billi0n
deadweight l0ss due t0 the m0n0p0ly.
 Figure
8.1i

Remember that deadweight l0ss is 0nly a result in deviati0ns fr0m the

equilibrium quantity. Between 30 milli0n sunglasses and 42 milli0n sunglasses, c0nsumers are
willing t0 pay m0re than the firm’s marginal c0st, s0 MB >MC. Since the m0n0p0list is
unwilling l0wer its price t0 increase 0utput (and l0se revenue fr0m its pre-existing sales), the
deadweight l0ss persists.
Answer 2

Elasticity is an ec0n0mic term that describes the impact 0f a change in 0ne ec0n0mic variable
0n an0ther.

Elasticity 0f Demand, 0n the 0ther hand, quantifies the impact 0f a change in an ec0n0mic
variable 0n the am0unt 0f a pr0duct that is wanted. Several variables influence the am0unt
desired f0r a pr0duct, including pe0ple's inc0me levels, the pr0duct's price, the price 0f
c0mpeting items in the sect0r, and a variety 0f 0thers.

Let's start with a definiti0n 0f Elasticity 0f Demand bef0re diving int0 the vari0us s0rts 0f
Elasticity 0f Demand.

Als0, have a l00k at 0ur article 0n the f0ur types 0f elasticities in ec0n0mics.

Demand Elasticity:

Demand Elasticity, 0r Demand Elasticity Elasticity is a measure 0f h0w much a pr0duct's

demand changes in reacti0n t0 changes in market fact0rs such as price, inc0me, and s0 0n.
When 0ther ec0n0mic c0nditi0ns change, it tracks the m0vement in demand.

In 0ther w0rds, demand elasticity is the pr0p0rti0n 0f a change in am0unt s0ught divided by a
change in an0ther ec0n0mic variable.

Different economic elements influence the demand for a commodity:

1. The c0st 0f the pr0duct

2. The c0st 0f ass0ciated g00ds

3. C0nsumers' inc0me levels

Demand Elasticity in Three Forms

Elasticity 0f demand is divided int0 three categ0ries based 0n the many elements that influence
the am0unt required f0r a pr0duct: Price Elasticity 0f Demand (PED), Cr0ss Elasticity 0f
Demand (XED), and Inc0me Elasticity 0f Demand (IED) (YED).

1. Demand Price Elasticity (PED)

The quantity requested f0r a pr0duct is affected by any change in the price 0f a c0mm0dity,
whether it be a dr0p 0r an increase. When the price 0f ceiling fans rises, f0r example, the
quantity requested decreases.

The Price Elasticity 0f Demand is a measure 0f h0w resp0nsive a quantity wanted is when the
price changes (PED).

The Price Elasticity 0f Demand is calculated using the f0ll0wing mathematical f0rmula:

PED = Percentage Change in Demanded Quantity / Percentage Change in Price

The intensity 0f the effect 0f price change 0n the am0unt required f0r a c0mm0dity is
determined by the 0utc0me 0f this f0rmula.
2. Demand Elasticity as a Function of Income (YED)

C0nsumer inc0me levels have a significant impact 0n the am0unt 0f a pr0duct desired. L00k at
the c0ntrast between items s0ld in rural markets and things s0ld in metr0 cities t0 see what I
mean.

The Inc0me Elasticity 0f Demand, c0mm0nly abbreviated as YED, refers t0 the sensitivity 0f
the quantity desired f0r a given c0mm0dity t0 changes in real inc0me (inc0me received after
inflati0n) 0f the c0nsumers wh0 purchase it, all 0ther fact0rs being equal.

Take a peek at 0ur bl0g 0n what is inflati0n if y0u're interested in learning m0re ab0ut it.

The Inc0me Elasticity 0f Demand is calculated using the f0ll0wing f0rmula:

YED = Percentage Change in Demanded Quantity / Percentage Change in Inc0me

The 0utc0me 0f this calculati0n may be used t0 assess if a pr0duct is a need 0r a luxury item.

3. Demand Elasticity (Cross Elasticity) (XED)

Multiple firms c0mpete in a market when there is an 0lig0p0ly. As a result, the quantity
requested f0r a pr0duct is affected n0t 0nly by its 0wn price, but als0 by the prices 0f 0ther
items.

Cr0ss Elasticity 0f Demand, abbreviated as XED, is an ec0n0mic term that evaluates the
sensitivity 0f the am0unt demanded 0f 0ne item (X) when the price 0f an0ther g00d (Y)
changes. It is als0 kn0wn as Cr0ss-Price Elasticity 0f Demand.
The f0rmula f0r calculating Demand Cr0ss Elasticity is as f0ll0ws:

XED = (percentage change in demand f0r 0ne g00d (X) / (change in price 0f an0ther g00d (Y))

The result achieved f0r a substitute g00d will always be p0sitive since anytime the price 0f an
item rises, s0 d0es the demand f0r its alternative. F0r a c0mplimentary g00d, h0wever, the
0utc0me will be negative.

The sensitivity 0f quantity demanded t0 a change in the price 0f the c0mm0dity, the inc0me 0f
c0nsumers buying the g00d, and the price 0f an0ther g00d is measured by these three f0rms 0f
Elasticity 0f Demand.

Apart fr0m these three f0rms, there are a few 0ther types 0f demand elasticity that we'll l00k at
presently.

5 Other Types of Demand Elasticity

Changes in ec0n0mic fact0rs have varying effects 0n the am0unt needed f0r a c0mm0dity.The
rate 0f change in demand in relati0n t0 the change in the price 0f a pr0duct determines whether
demand is elastic, inelastic, 0r unitary.

 Elastic,

 inelastic, and

 unitary are terms used to describe the amount of variation in the quantity
requested of an item.
• An elastic demand is 0ne in which the am0unt required 0f a pr0duct varies m0re in reacti0n t0
even min0r changes in an0ther ec0n0mic variable. F0r example, if the price 0f a cup 0f c0ffee
rises by $0.5, there is a very g00d likelih00d that the am0unt required w0uld fall dramatically.

• An inelastic demand is 0ne in which the quantity required varies very little in resp0nse t0 a
change in an0ther ec0n0mic variable. Petr0l 0r diesel are tw0 examples 0f this.

• Unitary elasticity 0ccurs when the variati0n in 0ne variable and the quantity s0ught are b0th
equal. 
We can further classify these elastic and inelastic types 0f demand int0 five categ0ries.

Demand Curves

 
 

1. Demand that is perfectly elastic

Perfectly elastic demand 0ccurs when a change in the price 0f a c0mm0dity causes a significant
spike 0r fall in demand.

In c0mpletely elastic demand, even a tiny increase in price can cause demand t0 fall t0 zer0,
whereas a small decrease in price can cause demand t0 s0ar t0 infinity.

Fully elastic demand, 0n the 0ther hand, is purely the0retical and has n0 practical use unless the
market is perfectly c0mpetitive and the pr0duct is h0m0gene0us.

The sl0pe and f0rm 0f the demand curve are influenced by the degree 0f elasticity 0f demand.
As a result, the sl0pe 0f the demand curve may be used t0 calculate the elasticity 0f demand.

A flatter sl0pe indicates that demand is m0re elastic. As a result, the sl0pe 0f a c0mpletely
elastic demand curve is h0riz0ntal.

2. Demand Is Perfectly Inelastic

A c0mpletely inelastic demand is 0ne that d0es n0t vary in resp0nse t0 a price adjustment. The
idea 0f perfectly inelastic demand, like perfectly elastic demand, is a the0retical c0ncept with n0
practical applicability. The desire f0r essential c0mm0dities, 0n the 0ther hand, may be the
cl0sest example 0f fully inelastic demand.

F0r a perfectly inelastic demand, the numerical value pr0duced fr0m the PED f0rmula is zer0.

F0r a perfectly inelastic demand, the demand curve is a vertical line with a sl0pe 0f zer0.
3. Demand Is Relatively Elastic

Demand is said t0 be relatively elastic when the pr0p0rti0nate change in demand exceeds the
c0rresp0nding change in the price 0f the item. Relatively elastic demand has a numerical value
ranging fr0m 0ne t0 infinity.

If the price 0f a thing rises by 25%, demand f0r the pr0duct must decline by m0re than 25% in a
reas0nably elastic market.
Unlike the 0ther f0rms 0f demand, m0derately elastic demand has a practical applicati0n since
many c0mm0dities react in the same way t0 price changes.. 
 
The demand curve 0f relatively elastic demand is gradually sl0ping. 

Demand Curves
Demand Is Relatively Inelastic

The pr0p0rti0nal change in the am0unt requested f0r a pr0duct is always smaller than the
pr0p0rti0nate change in the price in a relatively inelastic demand.

F0r example, if the price 0f an item decreases by 10%, the pr0p0rti0nate change in its demand
will n0t exceed 9.9%; if it exceeds 10%, it is said t0 as unitary elastic demand.

The numerical value 0f highly inelastic demand is always less than 1, and the demand curve f0r
this type 0f demand is fast sl0ping.

Unitary Elastic Demand (Unitary Elastic Demand) is a type 0f elastic

Unitary elastic demand 0ccurs when the pr0p0rti0nal change in the am0unt s0ught f0r a pr0duct
is equal t0 the pr0p0rti0nate change in the price 0f the item.

Unitary elastic demand has a numerical value 0f 0ne. A rectangular hyperb0la represents the
demand curve f0r unitary elastic demand.

Conclusion

We may sum up the bl0g by saying that the demand f0r a pr0duct is influenced by a variety 0f
fact0rs, and the three primary f0rms 0f demand elasticity describe h0w th0se fact0rs interact.

We have five m0re f0rms 0f elasticity 0f demand t0 describe the magnitude 0f the influence 0f
ec0n0mic fact0rs 0n the quantity demanded: perfectly elastic, perfectly inelastic, relatively
elastic, relatively inelastic, and unitary elastic.