Monopoly Markup

… a core concept in Economic Analysis and Atlas102

Click for MRU video

Click for MRU video

Concept description

Alex Tabarrok (reference below, video on right) examines how the relationship between the monopolist’s profit-maximising price and the elasticity of demand.

Using an example from the pharmaceutical industry, Tabarrok illustrates that the monopoly markup will be higher when the demand for its product is less elastic.

MarkupAndDemandThis can be demonstrated by comparing the monopoly markup for two different demand

Tabarrok notes that firms can acquire Market Power by selling a unique good with Barriers to Entry, such as:

He then shows how the monopolist will set both price and output to maximize profit.

MarketPower

For a linear demand curve one can use a short cut for finding the marginal revenue: the MR begins at the same point on the vertical axis as the demand curve and has twice the slope, and splits the distance on the horizontal axis in half.

ShortCutAnd, using the example of a pharmaceutical firm with the monopoly on an AIDS antiviral drug, Tabarrok shows how to add the average cost curve and calculate the monopolist’s profit.monopolyprofit

Practice questions

From http://www.mruniversity.com/node/267321, accessed 7 May 2016.

  1. In the textbook, The Applied Theory of Price, D. N. McCloskey refers to the equation MR= MC as the rule of rational life. Who follows this rule: monopolies, competitive firms, both or neither?

Atlas topic, subject, and course

Monopoly and Price Discrimination (core topic) in Economic Analysis and Atlas102 Economic Analysis.

Source

Alex Tabarrok, Maximizing Profit under Monopoly (11-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/monopoly-profit-maximization-price-aids-medication, accessed 7 May 2016.

Page created by: Ian Clark, last modified 7 May 2016.

Image: Alex Tabarrok, minute 0.14 of Maximizing Profit under Monopoly (11-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/monopoly-profit-maximization-price-aids-medication, accessed 7 May 2016.