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Applying the Elasticity Rules
 MC 

P  
1 
1
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 
Lectures in Microeconomics-Charles W. Upton
A Summary

MR  P 1 
1

P  MC
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P

 MC 
P 1 
1 
 
Applying the Elasticity Rules
Some Propositions
• We develop these elasticity relations to
make some points about how a monopolist
behaves.
Applying the Elasticity Rules
First Proposition
• The Monopolist
will always price
where demand is
elastic, that is when
 < -1.
Applying the Elasticity Rules
First Proposition
• The Monopolist will
always price where
demand is elastic, that
is when  < -1.
• Profit maximization
requires MR > 0.

MR  P 1 1
Applying the Elasticity Rules

First Proposition
• The Monopolist will
always price where
demand is elastic, that
is when  < -1.
• Profit maximization
requires MR > 0.

MR  P 1 1
Applying the Elasticity Rules
1   0
1

First Proposition
• The Monopolist will
always price where
demand is elastic, that
is when  < -1.
• Profit maximization
requires MR > 0.
• The only way that can
be true is if  < -1

MR  P 1 1
Applying the Elasticity Rules
1   0
1

First Proposition
• The Monopolist will
always price where
demand is elastic, that is
when  < -1.
• Profit maximization
requires MR > 0.
• The only way that can be
true is if  < -1
• To illustrate why, compute
MR for =-2 and =-1/2

MR  P 1 1

1   0
1
MR  P1  12   12 P
Applying the Elasticity Rules
First Proposition
• The Monopolist will
always price where
demand is elastic, that is
when  < -1.
• Profit maximization
requires MR > 0.
• The only way that can be
true is if  < -1
• To illustrate why, compute
MR for  = -2 and  = -½

MR  P 1 1

1   0
1
1

MR  P 1  0.5    P
Applying the Elasticity Rules
Second Proposition
• For the straight line
demand curve, MR is
zero midpoint between
the origin and the
quantity demanded at
P = 0.
Applying the Elasticity Rules
Second Proposition
• For the straight line
demand curve, MR is
zero midpoint between
the origin and the
quantity demanded at
P = 0.
• At the midpoint, we
know  = -1
Applying the Elasticity Rules
Second Proposition
• For the straight line
demand curve, MR is
zero midpoint between
the origin and the
quantity demanded at
P = 0.
• At the midpoint, we
know  = -1

MR  P 1 1
Applying the Elasticity Rules

First Application
• Suppose a firm
develops a cure for
cancer: one pill a day,
no side effects. True
or false: there would
be virtually no
elasticity of demand
for this wonder drug.
Applying the Elasticity Rules
First Application
• Suppose a firm
develops a cure for
cancer: one pill a day,
no side effects. True
or false: there would
be virtually no
elasticity of demand
for this wonder drug.

MR  P 1 1
Applying the Elasticity Rules

First Application
• Suppose a firm
develops a cure for
cancer: one pill a day,
no side effects. True
or false: there would
be virtually no
elasticity of demand
for this wonder drug.

MR  P 1 1
• False
Applying the Elasticity Rules

Second Application
• True or false: a
monopolist always
faces inelastic demand
Applying the Elasticity Rules
Second Application
• True or false: a
monopolist always
faces inelastic
demand.

MR  P 1 1
Applying the Elasticity Rules

Second Application
• True or false: a
monopolist always
faces inelastic
demand.

MR  P 1 1
• False
Applying the Elasticity Rules

Third Application
• Wilma Trotter has
shows that a new
product has a price
elasticity of demand of
–1.25. It will cost $10
to make the product.
How should the
product be priced?
Applying the Elasticity Rules
Third Application
• Wilma Trotter has
shows that a new
product has a price
elasticity of demand of
–1.25. It will cost $10
to make the product.
How should the
product be priced?
Applying the Elasticity Rules
 MC 
P 1 
1 
 
Third Application
• Wilma Trotter has
shows that a new
product has a price
elasticity of demand of
–1.25. It will cost $10
to make the product.
How should the
product be priced?
 MC 
P 1 
1 
 
 10 

P  
1 
 1  1.25 
Applying the Elasticity Rules
Third Application
• Wilma Trotter has
shows that a new
product has a price
elasticity of demand of
–1.25. It will cost $10
to make the product.
How should the
product be priced?
 10 

P  
1 
1

 1.25 
 10  10
P

 1  0.8  0.2
Applying the Elasticity Rules
Third Application
• Wilma Trotter has
shows that a new
product has a price
elasticity of demand of
–1.25. It will cost $10
to make the product.
How should the
product be priced?
 10  10
P

 1  0.8  0.2
• $50
Applying the Elasticity Rules
Fourth Application
•The following data display retail prices and
wholesale costs for two products. What are the price
elasticities of demand?
Item
Woman’s
Dress
New Car
Retail Price
Elasticity
$100
Wholesale
Price
$50
$20,000
$19,000
?
Applying the Elasticity Rules
?
Fourth Application
Item
Woman’s
Dress
New Car
Retail Price
Wholesale
Price
Elasticity
$100
$50
?
$20,000
$19,000
?
P  MC
1

P

Applying the Elasticity Rules
Fourth Application
Item
Woman’s
Dress
New Car
Retail Price
Wholesale
Price
Elasticity
$100
$50
P  MC
1

P

$20,000
$19,000
?
P  MC
1

P

Applying the Elasticity Rules
Fourth Application
Item
Woman’s
Dress
New Car
Retail Price
Wholesale
Price
Elasticity
$100
$50
100  50
1

100

$20,000
$19,000
?
P  MC
1

P

Applying the Elasticity Rules
Fourth Application
Item
Woman’s
Dress
New Car
Retail Price
Wholesale
Price
Elasticity
$100
$50
1
1

2

$20,000
$19,000
?
P  MC
1

P

Applying the Elasticity Rules
Fourth Application
Item
Woman’s
Dress
New Car
Retail Price
Wholesale
Price
Elasticity
$100
$50
= -2
$20,000
$19,000
?
P  MC
1

P

Applying the Elasticity Rules
Fourth Application
Item
Woman’s
Dress
New Car
Retail Price
Wholesale
Price
Elasticity
$100
$50
= -2
$20,000
$19,000
P  MC
1

P

P  MC
1

P

Applying the Elasticity Rules
Fourth Application
Item
Retail Price
Wholesale
1
Price
20000  19000

Woman’s 20000
$100
$50

Dress
New Car
$20,000
$19,000
P  MC
1

P

Applying the Elasticity Rules
Elasticity
= -2
Fourth Application
Item
Woman’s
Dress
New Car
Retail Price
Wholesale
Price
Elasticity
$100
$50
= -2
$20,000
$19,000
P  MC
1

P

Applying the Elasticity Rules
1
1

20

Fourth Application
Item
Woman’s
Dress
New Car
Retail Price
Wholesale
Price
Elasticity
$100
$50
= -2
$20,000
$19,000
= -20
P  MC
1

P

Applying the Elasticity Rules
Fifth Application
• Suppose it costs a
monopolist $10 to
make a product. True
or false: If demand
increases the
monopolist will raise
the price.
Applying the Elasticity Rules
Fifth Application
• Suppose it costs a
monopolist $10 to
make a product. True
or false: If demand
increases the
monopolist will raise
the price.
P
Applying the Elasticity Rules
MC
D
Fifth Application
• Suppose it costs a
monopolist $10 to
make a product. True
or false: If demand
increases the
monopolist will raise
the price.
D
P
Applying the Elasticity Rules
MC
D
Fifth Application
• Suppose it costs a
monopolist $10 to
make a product. True
or false: If demand
increases the
monopolist will raise
the price.
 MC 
P 1 
1 
 
D
P
Applying the Elasticity Rules
MC
D
Fifth Application
• Suppose it costs a
monopolist $10 to
make a product. True
or false: If demand
increases the
monopolist will raise
the price.
 MC 
P 1 
1 
 
D
P
• It Depends
Applying the Elasticity Rules
MC
D
Sixth Application
• Suppose it costs a
monopolist $10 to
make a product. True
or false: If demand
increases the
monopolist will make
more money
Applying the Elasticity Rules
Sixth Application
• Suppose it costs a
monopolist $10 to
make a product. True
or false: If demand
increases the
monopolist will make
more money
P
Applying the Elasticity Rules
D
Sixth Application
• Suppose it costs a
monopolist $10 to
make a product. True
or false: If demand
increases the
monopolist will make
more money
P
D
P
• True
Applying the Elasticity Rules
D
Seventh Application
• True or false: it is a
fair question on an
exam to ask you to
draw a monopolist’s
supply curve.
Applying the Elasticity Rules
Seventh Application
• True or false: it is a
fair question on an
exam to ask you to
draw a monopolist’s
supply curve.
• A fair question, but the
monopolist never has
a supply curve.
Applying the Elasticity Rules
Seventh Application
• True or false: it is a
fair question on an
exam to ask you to
draw a monopolist’s
supply curve.
• A fair question, but the
monopolist never has
a supply curve.
• The amount supplied
at a given price
depends on elasticity,
not just price.
Applying the Elasticity Rules
End
©2004 Charles
W. Upton
Applying the Elasticity Rules