The Inverse Elasticity Rule
A monopoly chooses that price that maximizes the difference between total revenue and total cost. The basic markup rule can be expressed as (P − MC)/P = 1/PED. The markup rules indicate that the ratio between profit margin and the price is inversely proportional to the price elasticity of demand. The implication of the rule is that the more elastic the demand for the product the less pricing power the monopoly has.
Read more about this topic: Monopoly (economics)
Famous quotes containing the words inverse, elasticity and/or rule:
“The quality of moral behaviour varies in inverse ratio to the number of human beings involved.”
—Aldous Huxley (1894–1963)
“One of the reforms to be carried out during the incoming administration is a change in our monetary and banking laws, so as to secure greater elasticity in the forms of currency available for trade and to prevent the limitations of law from operating to increase the embarrassment of a financial panic.”
—William Howard Taft (1857–1930)
“Therefore doth heaven divide
The state of man in divers functions,
Setting endeavor in continual motion,
To which is fixed, as an aim or butt,
Obedience; for so work the honeybees,
Creatures that by a rule in nature teach
The act of order to a peopled kingdom.”
—William Shakespeare (1564–1616)