Problem 1 We saw that a monopolist never p... [FREE SOLUTION]

Chapter 26: Problem 1

We saw that a monopolist never produced where the demand for output was inelastic. Will a monopsonist produce where a factor is inelastically supplied?

Short Answer

Expert verified

Yes, a monopsonist may produce where a factor is inelastically supplied.

Step by step solution

Understanding Monopsonist and Elasticity

A monopsonist is a single buyer in a market, similar to how a monopolist is a single seller. Elasticity refers to how much the quantity supplied of a factor responds to changes in its price. If the supply is inelastic, quantity doesn't change much with price changes.

Monopsonist's Behavior and Inelastic Supply

Unlike monopolists who avoid producing where demand is inelastic, monopsonists may buy where supply is inelastic. An inelastic supply implies that the price of the factor does not increase significantly as the monopsonist increases quantity purchased. The monopsonist can exploit this by maintaining lower factor prices.

Conclusion on Monopsonist Production Decision

A monopsonist may indeed buy where a factor is inelastically supplied. The monopsonist benefits from inelastic supply because it can purchase more of the factor without causing a large increase in price.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Elasticity

Elasticity measures how responsive the quantity supplied or demanded is to changes in price.
It is a crucial concept in economics, representing the relationship between price changes and their effects on supply or demand.
For example:

High elasticity means the quantity changes significantly with a small price change.
Low elasticity means the quantity changes little with price adjustments.

This concept is key when analyzing the behavior of monopsonists and monopolists.
In general, sellers and buyers in the market consider elasticity to make strategic decisions. A monopsonist, which is the single buyer, may act differently in case of inelastic supply. This is contrary to a monopolist, the single seller, who avoids inelastic demand because it limits pricing power.

Monopolist

A monopolist is the single seller in a market without direct competitors.
This unique position provides power to set prices for goods or services sold.
However, monopolists often avoid situations where the demand for their product is inelastic.

If they increase prices, consumers don't significantly reduce demand, limiting profit opportunities.
The firm might end up with decreased revenue if consumers cut back on purchases.

A monopolist aims for a balance where they can manage price and consumer response effectively.
The elasticity of demand plays a pivotal role in these decisions.

Inelastic Supply

Inelastic supply describes a situation where the quantity supplied of a factor does not change substantially with price variations.
It has a distinct position in a monopsonist market.
Unlike monopolists, monopsonists may actually benefit from inelastic supply.

The supply curve remains relatively unchanged despite price adjustments.
The monopsonist can secure large quantities at stable prices.

This stability allows the monopsonist to control prices, maintaining lower costs for their inputs.
This scenario highlights how different market dynamics can affect decision-making for buyers and sellers.

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