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Mathematically, the markup rule can be derived for a firm with price-setting power by maximizing the following expression for profit: = () where Q = quantity sold, P(Q) = inverse demand function, and thereby the price at which Q can be sold given the existing demand C(Q) = total cost of producing Q.
Markup (or price spread) is the difference between the selling price of a good or service and its cost.It is often expressed as a percentage over the cost. A markup is added into the total cost incurred by the producer of a good or service in order to cover the costs of doing business and create a profit.
Tobin's q [a] (or the q ratio, and Kaldor's v), is the ratio between a physical asset's market value and its replacement value. It was first introduced by Nicholas Kaldor in 1966 in his paper: Marginal Productivity and the Macro-Economic Theories of Distribution: Comment on Samuelson and Modigliani .
Of the many price-setting methods, a monopoly will set the price with respect to market demand id est demand-based pricing.. When a firm with absolute market power sets the monopoly price, the primary objective is to maximize its own profits by capturing consumer surplus and maximizing its own.
In other words, the rule is that the size of the markup of price over the marginal cost is inversely related to the absolute value of the price elasticity of demand for the good. [10] The optimal markup rule also implies that a non-competitive firm will produce on the elastic region of its market demand curve. Marginal cost is positive.
The index ranges from 0 to 1. A perfectly competitive firm charges P = MC, L = 0; such a firm has no market power. An oligopolist or monopolist charges P > MC, so its index is L > 0, but the extent of its markup depends on the elasticity (the price-sensitivity) of demand and strategic interaction with competing firms. The index rises to 1 if ...
Profit margin is calculated with selling price (or revenue) taken as base times 100. It is the percentage of selling price that is turned into profit, whereas "profit percentage" or "markup" is the percentage of cost price that one gets as profit on top of cost price. While selling something one should know what percentage of profit one will ...
The marginal revenue function is the first derivative of the total revenue function or MR = 120 - Q. Note that in this linear example the MR function has the same y-intercept as the inverse demand function, the x-intercept of the MR function is one-half the value of the demand function, and the slope of the MR function is twice that of the ...