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In microeconomics, a monopoly price is set by a monopoly. [1] [2] A monopoly occurs when a firm lacks any viable competition and is the sole producer of the industry's product. [1] [2] Because a monopoly faces no competition, it has absolute market power and can set a price above the firm's marginal cost. [1] [2]
Assuming that factor prices are constant, the production function determines all cost functions. [4] The variable cost curve is the constant price of the variable input times the inverted short-run production function or total product curve, and its behavior and properties are determined by the production function.
In addition to the absolute pass-through that uses incremental values (i.e., $2 cost shock causing $1 increase in price yields a 50% pass-through rate), some researchers use pass-through elasticity, where the ratio is calculated based on percentage change of price and cost (for example, with elasticity of 0.5, a 2% increase in cost yields a 1% increase in price).
Overall costs of capital projects are known to be subject to economies of scale. A crude estimate is that if the capital cost for a given sized piece of equipment is known, changing the size will change the capital cost by the 0.6 power of the capacity ratio (the point six to the power rule). [16] [d]
In mathematics, the capacity of a set in Euclidean space is a measure of the "size" of that set. Unlike, say, Lebesgue measure , which measures a set's volume or physical extent, capacity is a mathematical analogue of a set's ability to hold electrical charge .
The GO cost function is flexible in the price space, and treats scale effects and technical change in a highly general manner. The concavity condition which ensures that a constant function aligns with cost minimization for a specific set of , necessitates that its Hessian (the matrix of second partial derivatives with respect to and ) being negative semidefinite.
This is known as the production function. If a production set is separable then we may define a "production value function" f p (x) in terms of a price vector p. If x is a monetary quantity, then f p (x) is the maximum monetary value of output obtainable in Y from inputs whose cost is x.
In economics, the marginal cost is the change in the total cost that arises when the quantity produced is increased, i.e. the cost of producing additional quantity. [1] In some contexts, it refers to an increment of one unit of output, and in others it refers to the rate of change of total cost as output is increased by an infinitesimal amount.