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A firm making profits in the short run will nonetheless only break even in the long run because demand will decrease and average total cost will increase, meaning that in the long run, a monopolistically competitive company will make zero economic profit. This illustrates the amount of influence the company has over the market; because of brand ...
Profit maximization using the total revenue and total cost curves of a perfect competitor. To obtain the profit maximizing output quantity, we start by recognizing that profit is equal to total revenue minus total cost (). Given a table of costs and revenues at each quantity, we can either compute equations or plot the data directly on a graph.
The mathematical profit maximization conditions ("first order conditions") ensure the price elasticity of demand must be less than negative one, [2] [7] since no rational firm that attempts to maximize its profit would incur additional cost (a positive marginal cost) in order to reduce revenue (when MR < 0).
The degree to which a firm can raise its price above marginal cost depends on the shape of the demand curve at a firm's profit maximising level of output. [47] Consequently, the relationship between market power and the price elasticity of demand (PED) can be summarised by the equation:
Since for a price-setting firm < this means that a firm with market power will charge a price above marginal cost and thus earn a monopoly rent. On the other hand, a competitive firm by definition faces a perfectly elastic demand; hence it has η = 0 {\displaystyle \eta =0} which means that it sets the quantity such that marginal cost equals ...
[2] [3] Since a competitive market has many competing firms, a customer can buy widgets from any of the competing firms. [1] [4] [2] [5] Because of this tight competition, competing firms in a market each have their own horizontal demand curve that is fixed at a single price established by market equilibrium for the entire industry as a whole.
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 ...
The simplest version of the model compares a situation where initially the market is competitive to a situation where the post-merger market is not. However, if initially price exceeds marginal cost (i.e. the market is not competitive), further increases in price have a "first order" effect on consumer surplus (graphically, they are trapezoids ...