Answer to Question #25804 in Microeconomics for ANKIT AGRAWAL

Question

1. Show that if Ed ≤ 1, then the optimal price and quantity of output are not well defined for a homogeneous product having no substitutes when it is sold by a single producer in market.

Answer 1

A homogeneous product is one in which a product sold by one firm is indistinguishable from the same product sold by another competing firm.

Price taking occurs only in perfectly competitive markets. Therefore,identical goods sold at higher prices, by one firm will be above the
equilibrium demand for goods, which means that the firm which raises price
won't be able to sell any of their goods.
The demand curve for the individual firm is horizontally flat, although the
demand curve for the product on the entire market is negatively sloped. Firms
that produce homogenous goods in perfectly competitive markets also cannot set
price below equilibrium price because the firm will make a loss by selling
below the cost of supply. This is why firms in competitive markets are called
price takers

Firms that can differentiate their products from others cease to be homogenous, and therefore can monopolize on their unique alteration of a
product. They get to set their price to an extent.

Almost all economic activity in a real economy takes place in a state of monopolistic competition. All monopolies are price setters but they do compete
with close substitutes usually, which effects makes demand relatively more
elastic.