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I am having a difficulty understanding certain things about elasticity and would like to clarify them.

What I understand. Elasticity is the percent change in quantity due to a percent change in price, that is, how does output change due to a change in price. A good is inelastic, if there is only 1(or few) producers of this firm, since, there are no perfect substitutes for this good. Which implies that if the price where to increase quantity would not decrease as consumers have no other options. On the other hand, a good is elastic, when there are various other firms selling this same good. Thus if there is an increase in price of a good, consumers will chose to purchase from other firms who offer the same product.

Now, this is where I get really confused.
The sentence that "monopolists always operate on the elastic portion of their demand curve." The reason this confuses me, is that I thought if you are a monopoly then your good is inelastic as mentioned above.

The only explanation that I can provide to myself is that there are two levels of elasticity going on here. That is 1. elasticity between monopoly and perfect competition and 2. depending on which one there is another elasticity inside. To further explain what I mean, is if for instance we are dealing with a monopolist, we know that his demand will be inelastic. But not within this inelastic demand there is an elastic and inelastic portion. Am I completely incorrect? Please help me understand this concept.

If the assumption that there is one elasticity within the other is incorrect, this is my ultimate question.

If monopolists have inelastic demand (since they are the only producer of this good) how can they operate on an elastic portion?

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You are correct in saying that there is an elastic portion within the inelastic demand. The concept is much easier explained when using a simple demand curve diagram. From the diagram given below, we can clearly see the varying elasticities in different parts of the curve. You can even try it yourself, using 2 points on each part and comparing the elasticity.

enter image description here

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  • $\begingroup$ Thank you for the explanation and the graph is clear to me, perhaps I am overthinking this but I would like to understand something more. What I can't see, is how can there be an elastic portion within the inelastic demand. That is, how can you have something within that is greater than 1 if the entire demand is inelastic i.e. less than 1? $\endgroup$ – thisisme May 7 '17 at 18:44
  • $\begingroup$ I would suggest you take an arbitrary demand function, plot it on a graph paper and then at various points on the graph, as shown in the diagram, compare the change in demand with a change in price. That should help you understand the concept better. $\endgroup$ – Aman Khandelwal May 7 '17 at 18:54
  • $\begingroup$ web.mit.edu/11.203/www/econ/index.php%3Fid=5.html $\endgroup$ – Aman Khandelwal May 7 '17 at 18:59
  • $\begingroup$ I see, that link was helpful thank you. My mistake was that I was thinking of elasticity as slope and considering it to be constant at any point, but it changes at each point. So to conclude, I now understand why monopolists choose to operate in the elastic portion. It is because if they decrease price by $1 if they are in the elastic portion they will witness more increase in quantity (since price is more sensitive here) versus if they decrease price in an inelastic portion (where price is already low) and so the increase in quantity will not differ greatly. $\endgroup$ – thisisme May 7 '17 at 19:29
  • $\begingroup$ It is almost like for the elasticity between monopoly and perfect competition is viewed from the consumer's perspective. Whereas with the second form, the monopoly itself chooses where to operate, so more form the producer's perspective, if that makes sense. $\endgroup$ – thisisme May 7 '17 at 19:34

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