How to Calculate Markup Over Marginal Cost
Markup over marginal cost equals price minus marginal cost; as a percentage it is (P − MC) divided by MC, times 100.
The Markup Over MC formula
Calculator
Enter price, marginal cost and quantity to get the dollar markup, the percentage markup and the Lerner index.
The price charged at the output where MR = MC.
The cost of the last unit produced at that same output.
Used only to scale the per-unit markup up to a total.
Price stands 150% above marginal cost. A perfectly competitive firm produces where P = MC, so its markup is 0%.
- Dollar markup (P − MC)
- $30
- Total markup over marginal cost
- $9,000
- Lerner index
- 0.6
- Reading
- Price above marginal cost
The gap between price and the cost of the last unit.
The dollar markup across every unit sold. This is not profit, because it ignores fixed costs.
The same gap divided by price instead of by cost, which is why the Lerner index never passes 1.
A markup only shows pricing power. Whether it turns into profit depends on average total cost.
How to calculate Markup Over MC, step by step
- 1Find the price. Read the price the firm charges at the output level it has chosen.
- 2Find marginal cost there. Use the cost of the last unit produced, measured at the quantity where MR = MC.
- 3Subtract for the dollar markup. Markup = P − MC, which is zero for a price taker because price already equals marginal cost.
- 4Convert to a percentage. Divide the dollar markup by marginal cost and multiply by 100 to state markup as a percent of cost.
Worked example: Markup Over MC
A monopolist produces 300 units where MR = MC, charging $50 with marginal cost of $20. The dollar markup = 50 − 20 = $30, and the percentage markup = (30 ÷ 20) × 100 = 150%.
Markup Over MC questions
How is markup over marginal cost different from the Lerner index?
Markup divides the price gap by marginal cost, while the Lerner index divides the same gap by price, so the Lerner index is capped at 1 and a markup percentage is not.
What is the markup for a perfectly competitive firm?
Zero, because a price taker produces where P = MC, leaving no gap between price and marginal cost.
Does a bigger markup always mean bigger profit?
No, markup compares price to marginal cost while profit compares price to average total cost, so a firm with a large markup can still operate at a loss.
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