In a monopoly there is usually one monopolist firm which provides products and services to the market,. The demand curve in the monopolistic market is a downward sloping demand curve and the prices for the demand are managed by the monopolist firm through the adjustments made to the output level which effect the supply and the resultant demand for the products and services. The main relationship between prices, supply and demand here is that a higher output from the monopolistic firm results in lower market price.
The elasticity of demand is the responsiveness of the demand curve to the factors such as price, substitute products, complementary products, competition, income and wealth. The inelastic demand depicts that demand is steady and continuous regardless of any changes made in the above factors. Welfare is the aggregate of the consumer and the producer surplus however for monopolies welfare results from producer surplus only (Motta, 2004, p43). In a monopolistic market the welfare losses increase with inelastic demand as the allocative inefficiency increases as the producer surplus reduced due to inelastic demand resulting in a higher welfare loss.
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