Chapter 12, Problem 1DQ

To determine

The monopoly and price elasticity of a demand.

Explanation of Solution

We could possibly say that the mentioned statement is true. There is pure monopoly which is nonexistent. Let us say, that if you need to send a letter, then the only option we think of is the postal service. But in case, the postal service increases the charges of delivering a letter to the adjacent town, to two days by $15, then we will look for alternate options like using a courier, phone or fax the letter. But within the conscious limits, even if the rates are doubled, we have no substitute that can live up to the mark of a postal service, that too at a commensurate rate.

The same can be explained about pure monopoly, when we consider local electricity provider companies in any given town. If you need electricity for lights, fans, etc you can deal only with a sole company. So, it enjoys pure monopoly, even though other sources of energy like oil or kerosene are used for the basic purposes like heating or for the lights, but these are never going to be a convenient option for end users.

The idea of cross elasticity of the demand is used to gauge the presence of alternatives for the commodity of a monopoly company.  In case, the cross elasticity of the demand is higher than one, then the demand faced by that monopoly is elastic with respect to the alternate commodities, and the company will have lesser control over price of the commodity, than if the cross elasticity of the demand were inelastic.  In other words, the monopoly faces contest from the producers of alternative commodities.

Economics Concept Introduction

Concept Introduction:

Cross elasticity of demand: Cross price elasticity refers to the percentage change in the demand for goods and services due to the change occurred in the price of other related goods.

Monopoly: It is a market situation, in which only one producer or seller exists in the market. There is a restriction in the entry to the business.