Health Economics

  • The market phenomenon that exists when a seller's decision to increase or reduce the rate of supply of a good or service will change its market price. The problem for the seller is to find the output rate and price that maximize their objective function (usually assumed to be profit). Any firm that is not a price-taker has to discover (by guessing, searching for, copying similar others, doing market research on, running econometric models of, consulting entrails concerning.. .) the price that is most advantageous to it. Since the demand curve that confronts the seller will have negative slope (cf. the demand curve under price-taking) the point on this curve that is best from the seller's perspective may need to be searched for, it is not given (as under price-taking); hence the name. Whatever the method used by the seller to locate the 'best' price, in logic, the profit-maximizing price and rate of output are determined by equality between marginal cost and marginal revenue. This is shown in the diagram. The shaded area shows profit (maximized) at the price P and output rate Q, where marginal cost equals marginal revenue.