How does elasticity affect the profit maximizing price point?

1 Answer
Mar 21, 2016

Answer:

The profit maximizing price, P depends of elasticity and is given by:
#P=MC(varepsilon/(varepsilon+1))#

Explanation:

Price Elasticity theory maintains that long-term success and profitability depend upon ideal pricing, or producing a good to the point where the additional revenue of an extra unit of output equals the additional cost of producing that unit, i.e. MR=MC

Now #MR = (P+1/varepsilon) #
Where #P = "price", MR="Marginal Revenue", varepsilon = "elasticity"#

Now for profit maximizing company #MR = MC#
#MC="Marginal Cost"#

Thus #MR=MC=(P+1/varepsilon) # Solve for price
#P=MC(varepsilon/(varepsilon+1))#
The Above equation shows how the profit maximizing Price, P depends on elasticity.