Talk:Market power/Archives/2012
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Market Power and Elasticity of demand
Market power is the ability to raise price above marginal cost and earn a positive profit. Perloff, J: Microeconomics Theory & Applications with Calculus page 369. Pearson 2008. THe degree to which a firm can raise price above marginal depends on the shape of the demand curve at the profit maxiizing output. That is elasticity is the critical factor in determining market power. The relationship between market power and elastictiy can be summarized by the equation:
- P/MC = 1/(1 + (1/PED)
Jgard5000 (talk) 12:09, 26 October 2009 (UTC)jgard5000Jgard5000 (talk) 12:09, 26 October 2009 (UTC)
The higher the P/MC ratio the more market power. As evident from equation the P/MC ratio depends completely on elasticity of demand. As PED "increases" the P/MC ratio, or market power, approaches zero. Jgard5000 (talk) 12:21, 26 October 2009 (UTC)jgard5000Jgard5000 (talk) 12:21, 26 October 2009 (UTC) Perloff, J: Microeconomics Theory & Applications with Calculus Pearson 2008.
The equation is derived from the monopolist pricing rule:
- (P - MC)/P = -1/PED
- P = MC/ [1 + (1/PED)]
- P/MC = 1/ [1 + (1/PED)]
Jgard5000 (talk) 15:07, 26 October 2009 (UTC)jgard5000Jgard5000 (talk) 15:07, 26 October 2009 (UTC)