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Jan Mazza's avatar

"In the standard case of a price-taking (competitive) firm, the revenue elasticity with respect to an input is equal to the output elasticity. This is because the firm cannot influence the price it receives. So a 1% increase in input maybe leads to a 1% increase in output. This must lead to a 1% increase in revenue... when a firm has market power, this equivalence breaks down. If the firm increases its output by 1%, this will lead to a decrease in price. So, revenue will increase by less than 1%."

Something very obvious must escape me, but I cannot get around the idea that, if a firm faces a perfectly competitive market, its price will remain unchanged, but if it has market power, its price will decrease. Shouldn't the opposite apply?

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Loic's avatar

Do VAT and other taxes affect the markups? In South Africa in the 80s we had GST of 8%, today we have VAT of 15%

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