Will an increase in the demand for a monopolist’s product always result in a higher price? Explain. Will an increase in the supply facing a monopsonist buyer always result in a lower price? Explain.

In a monopoly market structure, the supply curve is absent because the quantity supplied by the monopolist depends upon the marginal costs incurred by the seller and the elasticity of the demand curve. The one-to-one correspondence between price and quantity supplied is absent here.

Thus, an increase in demand might not always lead to a rise in price or quantity. The rise in demand can affect both variables individually or simultaneously.

The following figure shows the situation in which the demand increases but the price does not:

In the figure, the monopolist’s demand curve increases from D1 to D2, leading to a consequent rise in the marginal revenue from MR1 to MR2. The marginal cost curve MC remains unchanged. The point at which the MC curve and MR2 intersect leads to a higher profit-maximizing quantity Q2. However, the price does not change as the new demand curve has a relatively higher elasticity.

Thus, an increase in the demand for a monopolist does not always result in a higher price.

The average expenditure curve AE of a monopsonist is indicative of the market supply. If it increases from AE1 to AE2, the marginal expenditure will also increase from ME1 to ME2. The following figure shows the changes in the conditions of the monopsony market:

The equilibrium quantity is established at the intersection of the marginal expenditure ME and the marginal value MV curve. The point is traced down to the supply curve AE to obtain the market price paid by the monopsonist. The increase in supply, in this case, is completely reflected in the rise in the equilibrium quantity from Q1to Q2. However, the price remains unchanged at P1= P2.

Thus, an increase in the supply for a monopsonist does not necessarily result in a price reduction.