First-degree price discrimination (also called perfect price discrimination) occurs when a producer charges each consumer his reservation price, the maximum amount that he is willing to pay, for each unit.
A monopolist should set its price such that the difference between the price and marginal cost as a percentage of price equals the inverse of the elasticity of demand of its product.
A monopoly can maximize its profit by producing at an output level at which its marginal revenue is equal to its marginal cost.
Monopoly power (also called market power) refers to a firm’s ability to charge a price higher than its marginal cost. Monopoly power typically exists where the there is low elasticity of demand and significant barriers to entry.
In economics, a monopoly is a market structure where only a single firm supplies a product which has no close substitutes. A firm which has a monopoly is called a monopolist.
Lerner index is a measure of monopoly power which equals the markup over marginal cost as percentage of price. Its value ranges from 0, in case of a perfect competition, to 1, in case of a pure monopoly.
A profit function is a mathematical relationship between a firm’s total profit and output. It equals total revenue minus total costs, and it is maximum when the firm’s marginal revenue equals its marginal cost.
In short-run, a firm should shut down immediately if the market price of its product is lower than its average variable cost at its profit-maximizing output level. In long-run, it should shut down if the price of its product is less than its average total cost.
Profit maximization rule (also called optimal output rule) specifies that a firm can maximize its economic profit by producing at an output level at which its marginal revenue is equal to its marginal cost.
Marginal revenue is the incremental revenue generated from each additional unit. It is the rate at which total revenue changes. It equals the slope of the revenue curve and first derivative of the revenue function.