Learn Before
  • Profit Maximization Condition (MRS = MRT)

  • Deriving the Price Markup-Demand Elasticity Relationship from the First-Order Condition

Profit-Maximizing Price Markup

A profit-maximizing firm sets its price such that the price markup—defined as the ratio of the difference between price and marginal cost to the price itself—is equal to the inverse of the price elasticity of demand. [4, 8, 11] This core principle, often called the Lerner Index, is established by rearranging the first-order condition for profit maximization. [4, 6, 8, 11]

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Related
  • Relationship Between Demand Curve Slope and Price Elasticity

  • Profit-Maximizing Price Markup

  • Profit-Maximizing Price Markup

Learn After
  • Figure 7.16 - Price Markup and Demand Elasticity

  • Low Competition and Inelastic Demand Lead to Higher Prices