Why do "price-maker" firms never want to produce in the inelastic part of the demand curve??
"Price-maker" firms, also known as firms with market power, have the ability to set their own prices in the market due to factors like limited competition or differentiated products. When it comes to deciding where to produce on the demand curve, they generally aim to maximize their profits.
The demand curve represents the relationship between the price of a good or service and the quantity demanded by consumers. The elasticity of demand is a measure of how responsive the quantity demanded is to a change in price. If demand is elastic, a small change in price will lead to a relatively large change in quantity demanded. Conversely, if demand is inelastic, a change in price will result in a relatively smaller change in quantity demanded.
Price-maker firms typically prefer to operate in the elastic part of the demand curve because it allows them to increase their revenues and profits. When demand is elastic, firms can raise prices and still sell a significant quantity of goods, thereby increasing their total revenue. Conversely, if a firm operates in the inelastic part of the demand curve, it means that a change in price will have only a small effect on the quantity demanded. In such a scenario, if the firm increases its price, it is likely to experience a decrease in quantity demanded, resulting in lower total revenue and potentially lower profits.
By producing in the elastic part of the demand curve, price-maker firms can achieve a balance between price and quantity, maximizing their total revenue and profits. Therefore, they tend to avoid producing in the inelastic part of the demand curve where their ability to increase prices is limited without a significant decrease in quantity demanded.