Question

Why optimal pricing formula is only applicable for parts of the demand curve at which E |ε_P^D|>1 ?

Answer 1

Optimal pricing strategy is known as perfect price discrimination and it is mainly practiced by Monopoly firms. Optimal pricing refers to the price and volume a company sells at which it maximizes its total revenue.

A firm that has some market power like a Monopoly firm, will always set it's optimal price where its demand curve is elastic because when demand curve is price elastic then marginal revenue is positive. And, a firm will never produce in the inelastic portion of the demand curve because when demand is inelastic, given price is positive, marginal revenue will be negative, and no firm will produce an extra unit if it loses its money.

So, a Monopoly firm always sets its optimal price at the point where demand is price elastic.