Question

How does a monopolist or monopolistically competitive firm determine graphically if the demand for its product is elastic, unit elastic or inelastic?

Why does it not want to operate where demand is inelastic

Answer 1

The firm determines graphically if the demand for its product is elastic, unit elastic, or inelastic by looking at the steepness of the demand curve. If the demand curve is very flat (close to horizontal), then this means that the demand is very elastic. On the other hand, if the demand is very steep (close to vertical), then this suggests that the demand is very inelastic. If the demand curve is neither too steep nor too flat, and close to a 45-degree line, the elasticity is very close to 1 (unit elasticity)

The monopolist does not want to operate where the demand is inelastic as this is not the profit-maximizing strategy. The firm can increase prices and increase the total revenues and profits (as the fall in demand is less than the rise in prices). Thus the monopolist will continue increasing prices and profits until it reaches an elastic part fo the demand curve where a further increase in price will lead to a fall in profits.