Question 52 Methodology for calculating reserves for profit growth and increasing profitability Reserves for increasing profitability indicators are reserves for profit growth. Methodology for calculating reserves for increasing profit due to: increasing sales volume for profitable products.

By selling its products, the company receives income, or revenue.

Income is the amount of money received by a company as a result of the production and sale of goods or services over a certain period of time. The amount of income and its change indicate the degree of efficiency of the company.

Distinguish total, average and marginal income.

Total (gross) income (TR ) is the total amount of cash revenue received by the company as a result of the sale of its products. It is calculated by the formula: TR = P Q, Where R– selling price per unit of production; Q– the number of units of products produced and sold. As we see, the amount of total income, other things being equal, depends on the volume of output and sales prices.

Average Income (AR) – this is the amount of cash revenue per unit of products sold. It is calculated by the formula: AR = TR / Q = (P  Q) / Q = P . The calculation of average income is usually used when prices change over a certain time interval or in cases where the range of products produced by a company consists of several or many goods or services.

Marginal Revenue (MR) is an increase in gross income resulting from the production and sale of an additional unit of product. It is calculated by the formula MR = TR/ Q, whereTR is the increase in gross income as a result of the sale of an additional unit of product;Q is the increase in production and sales volume per unit.

Comparison of marginal income and marginal costs for a commodity producer is important in developing its economic policy.

5. Company profit: concept and types

The profit of the company largely depends on the amount of income.

Profit represents the difference between total revenue and total costs, that is π= TR – TC, Where π – profit. The firm can calculate total profit (TR – TC), average profit (AR – ATC) and marginal profit (MR – MC).

Since there are accounting and economic costs, there are also accounting and economic profits.

Accounting profit – the difference between total revenue and external (accounting) costs. Let us recall that the latter include explicit, actual costs: wages, costs of fuel, energy, auxiliary materials, interest on loans, rent, depreciation, etc.

Economic profit - this is the part of the company’s income that remains after subtracting all costs from income: explicit (external) and implicit (internal), that is economic costs. Economic profit is also called net profit .

Economic profit is a certain excess of total income over economic costs. Its presence interests the manufacturer in this particular area of ​​business. At the same time, it encourages other firms to enter this field.

The essence of economic profit can be explained by the innovation of the entrepreneur, his use of innovative solutions in business affairs, and his willingness to bear full responsibility for the economic decisions made. Therefore, sometimes profit itself is defined as a payment for risk.

Depending on how income and costs are related, the company's profit can be positive(TR>TS), null(TR=TC) and negative(TR<ТС). Положительная прибыль означает, что фирма добилась самоокупаемости. Все издержки производства стали возмещаться полученным доходом.

Zero (normal) profit is income that reimburses the minimum costs of the entrepreneurial factor after the entrepreneur has reimbursed all production costs. It was previously noted that it is this profit that keeps the entrepreneur in this field of activity. However, at this moment there is no economic profit yet.

Negative profits mean the firm is making losses. The proceeds only partially cover production costs.

1. Monopoly
What is a monopoly?
Monopolist's marginal revenue
Profit maximization by a monopolist
Monopoly and elasticity of demand
How do taxes affect the behavior of a monopolist?
Monopoly and efficiency
2. Monopolistic competition
Price and production volume under conditions of monopolistic competition
3. Oligopoly
What is an oligopoly?
Oligopoly models
4. Use and distribution of resources by the firm
Marginal profitability of a resource
Marginal cost of a resource
Selecting a resource combination option
conclusions
Terms and concepts
Self-test questions

Perfect competition, as already noted, is rather an abstract model, convenient for analyzing the basic principles of the formation of a company’s market behavior. In reality, purely competitive markets are rare; as a rule, each company has “its own face,” and each consumer, choosing the products of a particular company, is guided not only by the usefulness of the product and its price, but also by his attitude towards the company itself, towards the quality of its products. her products. In this sense, the position of each company in the market is somewhat unique, or, in other words, there is an element of monopoly in its behavior.
This element leaves its mark on the company’s activities, forcing it to take a slightly different approach to the formation of a pricing strategy, determining the volume of product output that is most effective in terms of profits and losses.

Monopoly

What is a monopoly?

To determine how monopoly influences the behavior of a company, let us dwell on the theory of monopoly. What is a monopoly? How are the costs of a monopolist enterprise formed, based on what principles does it set the price for its products and how does it determine the volume of production?
The concept of pure monopoly is also usually an abstraction. Even the complete absence of competitors within the country does not exclude their presence abroad. Therefore, one can imagine a pure, absolute monopoly rather theoretically. A monopoly presupposes that one firm is the only producer of any product that has no analogues. At the same time, buyers do not have a choice and are forced to purchase these products from a monopolist company.
One should not equate pure monopoly with monopoly (market) power. The latter means the ability for a firm to influence price and increase economic profit by limiting the volume of production and sales. When they talk about the degree of monopolization of a market, they usually mean the strength of the market power of individual firms present in this market.
How does a monopolist behave in the market? He has complete control over the entire volume of product output; if he decides to increase the price, he is not afraid of losing part of the market, giving it to competitors who set lower prices. But this does not mean that he will endlessly increase the price of his products.
Since a monopoly firm, like any other firm, strives to obtain high profits, it takes into account market demand and costs when deciding on the selling price. Since the monopolist is the only producer of a given product, the demand curve for its product will coincide with the market demand curve.
What volume of production must the monopolist provide in order for its profit to be maximized? The decision on output volume is based on the same principle as in the case of competition, i.e. on the equality of marginal revenue and marginal cost.

Monopolist's marginal revenue

As already mentioned (see Chapter 11), a firm under conditions of perfect competition is characterized by equality of marginal revenue and price. For a monopolist the situation is different. The average income and price curve coincides with the market demand curve, and the marginal income curve lies below it.
Why does the marginal revenue curve lie below the market demand curve? Since the monopolist is the only manufacturer of products on the market and a representative of the entire industry, when he reduces the price of products to increase sales, he is forced to reduce it for all units of goods sold, and not just for the next one (Fig. 12.1).

Rice. 12.1. Price and marginal revenue of a monopolist firm:D - demand;MR - marginal revenue

For example, a monopolist can sell at a price of 800 rubles. only one unit of its products. To sell two units, he must reduce the price to 700 rubles. for both the first and second units of production. To sell three units of production, the price must become equal to 600 rubles. for each of them, four units - 500 rubles. etc. The income of the monopolist company will accordingly be upon sale: 1 unit. — 800 rub.; 2 units — 1400 (700.2); Z unit -1800 (600.3); 4 units - 2000 (500 . 4).
Accordingly, the marginal (or additional as a result of increasing sales by one unit of product) income will be: 1 unit. - 800 rub.; 2 units - 600 (1400 - 800); 3 units - 400(1800 - 1400); 4 units - 200 (2000 - 1800).
In Fig. 12.1, the demand and marginal revenue curves are shown as two divergent lines, and the marginal revenue in all cases, except for the output of 1 unit, is less than the price. And since the monopolist makes a decision on the volume of production, equalizing marginal revenue and marginal costs, the price and quantity of production will be different than under competition.

Profit maximization by a monopolist

To show at what price and what volume of output the monopolist's marginal revenue will be as close as possible to marginal costs and the resulting profit will be the greatest, let us turn to a numerical example. Let's imagine that the company is the only manufacturer of this product on the market, and summarize the data on its costs and income in table. 12.1.

Table 12.1. Dynamics of costs and income of company X under monopoly conditions

We assumed that 1 thousand units. A monopolist can sell its products at a price of 500 rubles. In the future, when expanding sales by 1 thousand units. he is forced to reduce its price by 12 rubles each time, so marginal income is reduced by 4 rubles. with every increase in sales volume. The firm will maximize profit by producing 14 thousand units. products. It is at this volume of output that its marginal revenue is closest to marginal cost. If it produces 15 thousand units, then this additional 1 thousand units. will add more to costs than to income, thereby reducing profits.
In a competitive market, when the price and marginal revenue of the firm are the same, 15 thousand units would be produced. products, and the price of these products would be lower than under monopoly conditions:

Graphically, the process of choosing price and production volume by a monopolist firm is shown in Fig. 12.2.

Rice. 12.2. Determination of price and production volume by a monopolist firm:D - demand;MR—marginal revenue; MC - marginal cost
Since in our example production is possible only in whole units of production, and point A on the graph lies between 14 and 15 thousand units, 14 thousand units will be produced. products. The 15th thousand that was not produced by the monopolist (and it would have been produced in a competitive environment) means a loss for consumers, since some of them refused to purchase due to the high price set by the monopolist manufacturer.
Any firm whose demand for its product is not perfectly elastic will face a situation where marginal revenue is less than price. Therefore, the price and volume of production that brings it maximum profit will be respectively higher and lower than under conditions of perfect competition. In this sense, in imperfectly competitive markets (monopoly, oligopoly, monopolistic competition), each firm has a certain monopoly power, which is strongest in pure monopoly.

Monopoly and elasticity of demand

As already noted, marginal revenue under perfect competition is equal to the unit price of the product and the demand for the firm's products is perfectly elastic. When monopoly power exists, marginal revenue is less than price, the demand curve for the firm's product is sloping, which allows the firm with monopoly power to earn additional profits.


The elasticity of demand for a product (even if there is only one seller of this product on the market) affects the price set by the monopolist. Having information about the elasticity of demand E R, as well as data characterizing the marginal costs of the company MC, the company’s management can calculate the price of products P using the formula:

The higher the elasticity of demand, the closer the monopolist’s operating conditions are to the conditions of free competition, and vice versa, with inelastic demand, the monopolist has more opportunities to “inflate” prices and receive monopoly income.

How do taxes affect the behavior of a monopolist?

Since the tax increases marginal costs, their MC curve will shift to the left and up to position MC1 as shown in Fig. 12.3. The firm will now maximize its profit at the intersection of P1 and Q1.
The monopolist will reduce production and increase price as a result of the tax. How much it will increase the price can be calculated using formula (12.1). If the elasticity of demand, for example, is -1.5, then

Moreover, after the introduction of the tax, the price will increase by three times the amount of the tax. The effect of a tax on the monopoly price thus depends on the elasticity of demand: the less elastic the demand, the more the monopolist will increase the price after introducing the tax.

Rice. 12.3. The effect of a tax on the price and volume of production of a monopolist firm:D—demand, MR—marginal revenue; MC - marginal costs excluding tax; MC1 - marginal costs including tax

Valuation of monopoly power

Elasticity of demand is an important factor limiting the monopoly power of a firm in the market. If we are dealing with a pure monopoly (only one seller), the elasticity of demand becomes the only market factor restraining monopoly arbitrariness. That is why the activities of all branches of natural monopoly are regulated by the state. In many countries, natural monopoly enterprises are state property.
However, a pure monopoly is quite rare; as a rule, either monopoly power is divided between several large firms, or many small firms operate in the market, each of which produces products that are different from the others.
Thus, in imperfectly competitive markets, each firm has some degree of market power, which allows it to charge a price above its marginal revenue and earn an economic profit.
As is known, the difference between price and marginal revenue depends on the elasticity of demand for the company's products: the more elastic the demand, the less opportunities for obtaining additional profit, the less the market power of the company.
Under conditions of a pure monopoly, when the demand for a firm's products coincides with the market demand, its elasticity is a determining assessment of the firm's market power. In other cases, when market power is divided between two, three or more firms, it depends on the following factors:
1. Elasticity of market demand. The demand for an individual firm's products cannot be less elastic than market demand. The greater the number of firms represented on the market, the more elastic the demand for the products of each of them will be. The presence of competitors does not allow an individual firm to significantly raise its price without fear of losing part of its market.
Therefore, assessing the elasticity of demand for a company's products is information that should be known to the company's management. Data on elasticity should be obtained by analyzing the company's sales activities, sales volume at various prices, conducting marketing research, assessing the activities of competitors, etc.
2. Number of firms on the market. However, the number of firms alone does not give an idea of ​​how monopolized the market is. To assess market competitiveness, the Herfindahl market concentration index is used, characterizing the degree of market monopolization:

H=p12 + p22 + …….+ p12 +….+ pn2 (12.2)
where H is the concentration indicator; p1 ,p2,…….,pi …. pn is the percentage share of firms in the market.

Example 12.1. Let us evaluate the degree of market monopolization in two cases: when the share of one firm is 80% of the total sales of a given product, and the remaining 20% ​​is distributed among the other three firms, and when each of the four firms makes 25% of sales on the market.
The market concentration index will be: in the first case H = 802+ 6.672 +6.672 + 6.672 = 6533;
in the second case H = 252i 4 == 2500.
In the first case, the degree of market monopolization is higher.

3. Behavior of firms in the market. If firms in the market adhere to a strategy of fierce competition, reducing prices to capture a larger market share and displace competitors, prices may fall almost to competitive levels (price and marginal cost equality). Monopoly power and, accordingly, monopoly income of firms will decrease. However, obtaining high incomes is very attractive for any company, therefore, instead of aggressive competition, overt or secret collusion and market division are more preferable.
The structure of the market and the degree of its monopolization must be taken into account by the company when choosing an operating strategy. The emerging Russian market is characterized by a highly monopolized structure, supported by the creation in recent years of various kinds of concerns, associations and other associations, one of the goals of which is to maintain high prices and ensure a “quiet existence”. At the same time, the expected increased openness of the Russian economy to the world economy leads to competition with foreign firms and significantly complicates the position of domestic monopolists.
In addition to the economies of scale already discussed above, there are other reasons leading to monopoly. Among them, a significant role is played by the establishment of barriers to entry of new firms into the industry. Such obstacles may include the need to obtain special permission from government agencies to engage in a particular type of activity, licensing and patent barriers, customs restrictions and direct import bans, difficulties in obtaining loans, high initial costs for opening a new enterprise, etc.
For example, to open a commercial bank in Russia, in addition to the established minimum size of the authorized capital, a special permit from the Central Bank of the Russian Federation is required, which is quite difficult to obtain. It is no less difficult to “get” a relatively cheap loan. The introduced new import duties on alcoholic beverages, tobacco products, cars, etc. reduce the competitive capabilities of foreign goods and strengthen the position of domestic producers.
At the same time, obtaining high profits is a powerful incentive that attracts new firms to a monopolized industry. And if the industry is not a natural monopoly (and most Russian monopolies are not), then a monopolist firm can expect an unexpected competitor to appear at any moment.
The higher the profit of a monopolist enterprise, the more people want to enter the industry, for example, by expanding production and sales of substitute goods. The entry of new firms into the market with products that can effectively replace the monopolist's products leads to a switch in consumer demand. In such conditions, the monopolist will be forced to reduce the price and give up part of the profit in order to maintain its position in the market.
Legislative barriers to entry into the industry also do not last forever. To support government officials who express their interests, monopolists spend significant funds, which are included in costs, increasing them. Therefore, in a developed market economy, the position of monopolistic firms is not as “cloudless” as it seems at first glance.

Price discrimination

Price discrimination is one of the ways to expand the sales market under monopoly conditions. By producing less product and selling it at a higher price than in conditions of pure competition, the monopolist thereby loses some of the potential buyers who would be willing to purchase the product if its price were lower than the monopoly price. however, by reducing the price in order to expand sales volume, the monopolist is forced to reduce the price of all products sold. But in some cases, a company may set different prices for the same products for different groups of buyers. If some buyers purchase products at a lower price than others, the practice occurs price discrimination.
Price discrimination can be carried out under the following conditions:
. the buyer, having purchased the product, does not have the opportunity to resell it;
. It is possible to divide all consumers of a given product into markets where demand has different elasticities.
Indeed, if a company that produces any product that can be resold, such as televisions, refrigerators, cigarettes, etc., decides to resort to price discrimination, it will face the following situation. Reducing the price of these goods for pensioners and maintaining it at the original level for all other categories of the population will lead to the fact that, when purchasing these goods, pensioners will immediately resell them. In addition, such a pricing policy may cause customer dissatisfaction.
A different situation arises if the products cannot be resold; This includes primarily certain types of services. In this case, for consumer groups whose demand is more elastic, various types of price discounts are established. In other words, different groups of consumers represent different markets, the elasticity of demand in which is different.
Let's assume that some airline sold 100 thousand air tickets at a price of 500 rubles. for one ticket. This price was set based on the equality of marginal revenue and marginal costs. The company's monthly gross income was RUB 50 million. However, as a result of the changes that occurred (fuel prices increased, workers' wages were increased), the company's costs increased, and the ticket price was doubled. At the same time, the number of tickets sold decreased by half and amounted to 50 thousand. Despite the fact that the total gross income remained at the level of 50 million rubles, there is an opportunity to generate additional income by attracting passengers who refused to fly due to the high price through discounts.
In Fig. Figure 12.4 graphically depicts a situation where the market for airline services is divided into two separate markets. The first (Fig. 12.4, a) is represented by wealthy people, businessmen, for whom speed of movement is important, and not the price of a ticket. Therefore, their demand is relatively inelastic. The second market (Fig. 12.4, b) is people for whom speed is not so important, and at high prices they will prefer to use the railway. In both cases, the airline's marginal cost is the same, only the elasticity of demand is different.
From Fig. 12.4 it is clear that with a ticket price of 1 thousand rubles. not a single consumer from the second market will use the airline's services. However, if this group of consumers is given a 50% discount, then the tickets will be sold and the company’s income will increase by 25 million rubles. monthly.

Rice. 12.4. Price discrimination model: MC - marginal costs,D andMR - demand and marginal revenue of the company in the first market;D1 andMR1 - demand and marginal revenue of the company in the second market
On the one hand, price discrimination allows increasing the monopolist’s income, and on the other hand, more consumers have the opportunity to use this type of service. This pricing policy is beneficial to both parties. However, in some countries, price discrimination is seen as an obstacle to competition and an increase in monopoly power, and its individual manifestations are subject to antitrust laws.

Monopoly and efficiency

Modern economists believe that the spread of a monopoly reduces economic efficiency for at least three main reasons.
First, the monopolist's profit-maximizing output is lower and the price higher than under perfect competition. This leads to the fact that society's resources are not used to their fullest extent, and at the same time, some of the products needed by society are not produced. The quantity of products produced does not reach the point corresponding to the minimum average gross costs, as a result of which production is not carried out at the minimum possible costs at a given level of technology. In other words, maximum production efficiency is not achieved.
Secondly, being the only seller on the market, the monopolist does not strive to reduce production costs. There is no incentive for him to use the most advanced technology. Upgrading production, reducing costs, and flexibility are not issues of survival for him. For the same reasons, the monopolist has little interest in research and development and the use of the latest achievements of scientific and technological progress.
Thirdly, barriers to the entry of new firms into monopolized industries, as well as the enormous effort and resources that monopolists spend on maintaining and strengthening their own market power, have a restraining effect on economic efficiency. Small firms with new ideas find it difficult to break into monopolized markets.
Another point of view on the problems of monopoly and efficiency is represented by the position of J. Galbraith and J. Schumpeter. Without denying the negative aspects of a monopoly (for example, higher prices for products), they also highlight its advantages from the point of view of scientific and technological progress. These advantages, in their opinion, are as follows:
1. Perfect competition requires each manufacturer to use the most efficient equipment and technology that already exists. However, the development of new progressive technical solutions is beyond the power of an individual competitive company. Significant funds are needed to finance R&D, which a small firm that does not receive a stable economic profit cannot have. At the same time, monopolies or oligopolies with high economic profits have sufficient financial resources to invest in scientific and technological progress.
2. The high barriers that exist to the entry of new firms into the industry give oligopolies and monopolies confidence that economic profits, which result from the use of scientific and technological advances in production, will last for a long time and investments in R&D will provide long-term returns.
3. Obtaining monopoly profits through higher prices is a stimulus for innovation. If every cost-cutting innovation was followed by a price drop, there would be no reason to develop innovative processes.
4. A monopoly stimulates competition, since monopoly high profits are extremely attractive to other firms and support the latter’s desire to enter the industry.
5. In some cases, a monopoly helps reduce costs and realize economies of scale (natural monopoly). Competition in such industries would lead to higher average costs and lower efficiency.
All market economies have antitrust laws that control and limit monopoly power.

2. Monopolistic competition

Two extreme types of markets were considered: perfect competition and pure monopoly. However, real markets do not fit into these types; they are very diverse. Monopolistic competition is a common type of market that is closest to perfect competition. The ability for an individual firm to control price (market power) is negligible here (Figure 12.5).

Rice. 12.5. Strengthening market power

Let us note the main features characterizing monopolistic competition:
. there are a relatively large number of small firms on the market;
. these firms produce a variety of products, and although each firm's product is somewhat specific, the consumer can easily find substitute goods and switch his demand to them;
. entry of new firms into the industry is not difficult. To open a new vegetable shop, atelier, or repair shop, no significant initial capital is required. Economies of scale also do not require the development of large-scale production.
The demand for the products of firms operating in conditions of monopolistic competition is not completely elastic, but its elasticity is high. For example, the sportswear market can be classified as monopolistic competition. Adherents of Reebok sneakers are willing to pay a higher price for its products than for sneakers from other companies, but if the price difference turns out to be too significant, the buyer will always find analogs from lesser-known companies on the market at a lower price. The same applies to products from the cosmetics industry, clothing, medicines, etc.
The competitiveness of such markets is also very high, which is largely due to the ease of access of new firms to the market. Let us compare, for example, the market for steel pipes and the market for washing powders. The first is an example of oligopoly, the second is monopolistic competition.
Entering the steel pipe market is difficult due to large economies of scale and large initial capital investments, while the production of new varieties of washing powders does not require the creation of a large enterprise. Therefore, if firms producing powders earn large economic profits, this will lead to an influx of new firms into the industry. New companies will offer consumers new brands of washing powders, sometimes not much different from those already produced (in new packaging, a different color, or intended for washing different types of fabrics).

Price and production volume under conditions of monopolistic competition

How is a firm's price and production volume determined under conditions of monopolistic competition? In the short run, firms will choose the price and output that maximize profits or minimize losses, based on the already known principle of equality of marginal revenue and marginal costs.
In Fig. Figure 12.6 shows the curves of price (demand), marginal revenue, marginal and average variables and gross costs of two firms, one of which maximizes profits (Fig. 12.6, a), the other minimizes losses (Fig. 12.6, b).

Rice. 12.6. The price and volume of production of a firm in conditions of monopolistic competition, maximizing profits (a) and minimizing losses (b):D - demand:MR—marginal revenue; MC - marginal costs:AVC - average variable costs; ATC - average gross costs

The situation is in many ways similar to perfect competition. The difference is that the demand for a firm's output is not perfectly elastic, and therefore the marginal revenue schedule falls below the demand schedule. The firm will receive the greatest profit at price P0 and output Q0, and minimal losses at price P1 and output Q1.
However, in monopolistic competitive markets, economic profits and losses cannot last long. In the long run, firms suffering losses will choose to exit the industry, and high economic profits will encourage new firms to enter. New firms, producing products that are similar in nature, will gain their market share, and the demand for the goods of the firm that received economic profit will decrease (the demand graph will shift to the left).
A reduction in demand will reduce the firm's economic profit to zero. In other words, the long-term goal of firms operating under monopolistic competition is to break even. The long-term equilibrium situation is shown in Fig. 12.7.

Rice. 12.7. Long-term equilibrium of a firm under monopolistic competition:D - demand;MR—marginal revenue; MC - marginal costs; ATC - average gross costs

The lack of economic profit discourages new firms from entering the industry and old firms from leaving the industry. However, in conditions of monopolistic competition, the desire to break even is more of a tendency. In real life, firms can earn economic profits for a fairly long period. This is due to product differentiation. Some types of products produced by firms are difficult to reproduce. At the same time, barriers to entry into the industry, although not high, still exist. For example, to open a hairdresser or engage in private medical practice, you must have the appropriate education confirmed by a diploma.
Is the market mechanism of monopolistic competition effective? From the point of view of resource use, no, since production is not carried out at minimum costs (see Fig. 12.7): production Q0 does not reach the value where the firm’s average gross costs are minimal, i.e. make up the value of Q1. However, if we evaluate efficiency from the point of view of satisfying the interests of consumers, then a variety of products that reflect the individual needs of people is more preferable to them than monotonous products at lower prices and in larger volumes.

3. Oligopoly

What is an oligopoly?

Oligopoly is a type of market in which a few firms control the bulk of the market. At the same time, the product range can be both small (oil) and quite extensive (automobiles, chemical products). An oligopoly is characterized by restrictions on the entry of new firms into the industry; they are associated with economies of scale, large advertising expenditures, and existing patents and licenses. High barriers to entry are also a consequence of actions taken by leading firms in an industry to prevent new competitors from entering.
A feature of oligopoly is the interdependence of firms' decisions on prices and production volume. No such decision can be made by a company without taking into account and assessing possible responses from competitors. The actions of competing firms are an additional constraint that firms must consider when determining optimal price and output. Not only costs and demand, but also the response of competitors determine decision making. Therefore, an oligopoly model must reflect all these three points.

Oligopoly models

There is no single theory of oligopoly. However, economists have developed a number of models, which we will briefly discuss.
Cournot model. The first attempt to explain the behavior of oligopoly was made by the Frenchman A. Cournot in 1838. His model was based on the following premises:
. there are only two firms on the market;
. Each firm, when making its decision, considers its competitor's price and production volume to be constant.
Let us assume that there are two firms operating in the market: X and Y. How will firm X determine the price and volume of production? In addition to costs, they depend on demand, and demand, in turn, on how many products firm Y will produce. However, what firm Y will do is unknown to firm X; it can only assume possible options for its actions and plan its own production accordingly.
Since market demand is a given value, the expansion of production by a firm will cause a reduction in demand for the products of firm X. In Fig. Figure 12.8 shows how the demand schedule for firm X's products will shift (it will shift to the left) if firm Y begins to expand sales. The price and production volume set by firm X based on the equality of marginal revenue and marginal costs will decrease, respectively, from P0 to P1, P2 and from Q0 to Q1,Q2.

Rice. 12.8. Cournot model. Change in price and volume of output by firm X when firm Y expands production:D - demand;MR—marginal revenue; MC - marginal cost

If we consider the situation from the position of company Y, then we can draw a similar graph reflecting the change in the price and quantity of its products depending on the actions taken by company X.
Combining both graphs, we obtain the reaction curves of both firms to each other’s behavior. In Fig. 12.9, the X curve reflects the reaction of the company of the same name to changes in the production of the Y company, and the Y curve, respectively, vice versa. Equilibrium occurs at the point of intersection of the reaction curves of both firms. At this point, firms' assumptions match their actual actions.

Rice. 12.9. Reaction curves of firms X and Y to each other's behavior

The Cournot model does not reflect one essential circumstance. It is assumed that competitors will react to a firm's price change in a certain way. When firm Y enters the market and takes away some of the consumer demand from firm Y, the latter “gives up” and enters the price game, reducing prices and production volume. However, firm X can take an active position and, by significantly reducing the price, prevent firm Y from entering the market. Such actions of the firm are not covered by the Cournot model.
A “price war” reduces the profits of both sides. Since the decisions of one of them influence the decisions of the other, there are reasons to agree on fixing prices and dividing the market in order to limit competition and ensure high profits. Since all kinds of collusions are subject to antimonopoly legislation and are prosecuted by the state, firms in an oligopoly prefer to refuse them.
Since price competition benefits no one, each firm would be willing to charge a higher price if its competitor did the same. Even if demand changes, or costs are reduced, or some other event occurs that allows the price to be reduced without harming profits, the company will not do this for fear that competitors will perceive such a move as the beginning of a price war. Increasing prices is also not attractive, since competitors may not follow the company's example.
The firm's reaction to price changes by competitors is reflected in curved curve models demand for a firm's products in an oligopoly. This model was proposed in 1939 by the Americans
R. Hall, K. Hitcham and P. Sweezy. In Fig. Figure 12.10 shows the demand and marginal revenue curves of firm X (highlighted with a bold line). If a firm raises its price above P0, its competitors will not raise prices in response. As a result, firm X will lose its customers. The demand for its products at prices above P0 is very elastic. If firm X sets a price below P0, then competitors are likely to follow it in order to maintain their market share. Therefore, at prices below P0, demand will be less elastic.

Rice. 12.10. Bent demand curve model:D1,MR1 - demand curves and marginal revenue of the firm at prices above P0;D2 MR2—demand and marginal revenue curves for the firm at prices below P0

A sharp difference in the elasticity of demand at prices above and below P0 leads to the fact that the marginal revenue curve is interrupted, which means that a decrease in price cannot be compensated by an increase in sales volume. The curved demand curve model provides an answer to the question of why firms in an oligopoly strive to maintain stable prices by transferring competition to the non-price area.
There are other models of oligopoly based on game theory. Thus, when determining its own strategy, the company evaluates the likely profits and losses, which will depend on what strategy the competitor chooses. Let's assume that firms A and B control the majority of sales in the market. Each of them strives to increase sales and thereby ensure increased profits. The result can be achieved by reducing prices and attracting additional buyers, intensifying advertising activities, etc.
However, the outcome for each firm depends on the competitor's reaction. If firm A starts cutting prices and firm B follows, neither will increase their market share and their profits will decline. However, if firm A lowers its prices and firm B does not do the same, then firm A's profits will increase. When developing its pricing strategy, firm A calculates possible responses from firm B (Table 12.2).

Table 12.2. The influence of market strategy on changes in the profit of firm A
(numerator) and company B (denominator), million rubles.

If firm A decides to reduce prices and firm B follows, the profit of firm A will decrease by 1000 thousand rubles. If company A reduces prices, and company B does not do the same, then the profit of company A will increase by 1,500 thousand rubles. If firm A does not take any steps in the area of ​​prices, and firm B reduces its prices, the profit of firm A will be reduced by 1,500 thousand rubles. If both firms leave prices unchanged, their profits will remain unchanged.
What strategy will firm A choose? The best option for her is to reduce prices with the stability of company B, in which case profits increase by 1,500 thousand rubles. However, this option is the worst from the point of view of firm B. For both firms, it would be advisable to leave prices unchanged, while profits would remain at the same level. At the same time, fearing the worst possible option, firms will reduce their prices, losing 1000 thousand rubles each. arrived. Firm A's strategy to reduce prices is called strategy of least losses.
The desire for minimal losses can explain why firms in an oligopoly prefer to spend significant amounts of money on advertising, increasing their costs without achieving an increase in market share.
None of the above oligopoly models can answer all the questions related to the behavior of firms in such markets. However, they can be used to analyze certain aspects of firms' activities in these conditions.

4. Use and distribution of resources by the firm

As shown above, firms in market conditions widely use the method of comparing marginal revenue and costs when making decisions about sales volume and product price. The same method is used to determine the amount of resources necessary for the production of products, providing the company with minimum total costs and, accordingly, maximum profit. This is exactly what will be discussed below.
What determines the demand for resources on the part of an individual firm? First of all, it depends on the demand for finished products produced using these resources, therefore, the higher the demand for products, the higher the demand for the necessary resources, taking into account changes in the efficiency of their use. Thus, in developed countries, demand for energy resources is growing very slowly. .Another circumstance affecting the demand for resources is their prices. The company's funds allocated for the purchase of resources are included in its production costs, so the company strives to use resources in such a quantity and combination that will allow it to obtain maximum profit.
The amount of resources a firm uses depends on their output, or productivity. The latter is subject to the law of diminishing returns. Therefore, the firm will expand its use of resources until each additional resource increases its income to a greater extent than its costs.
How does the introduction of additional resources into production affect the firm's income? An increase in the use of any resource leads to an increase in output and, consequently, the firm's income.

Marginal profitability of a resource

Suppose the firm uses only one variable resource. It may be labor, a separate type of equipment, etc. The increase in output in physical terms, ensured by increasing this resource by one unit, is called marginal product. The increase in a firm's income due to an additional unit of a given resource is called marginal return on a resource or income from the marginal revenue product MRP. As noted above, marginal product first rises and then begins to decline in accordance with the law of diminishing returns. Since the growth of the marginal product occurs over a very short period, we can neglect it and assume that from the very beginning it will decrease.
Let's consider the marginal profitability of the resource of company X (Table 12.3). If a firm operates under conditions of perfect competition, the price of output is constant and does not depend on the volume of output. If the firm is an imperfect competitor, then it is forced to reduce its price as it expands its sales volume. Accordingly, the marginal return on the resource of an imperfect competitor firm does not coincide with the marginal return on the resource of a competitive firm.

Table 12.3. Marginal profitability of resource firm X under conditions of perfect and imperfect competition in the product market

From the data in table. 12.3 shows that the rate of decline in the profitability of a resource for a monopolist is higher than for a purely competitive firm, and the graph of the marginal profitability of a resource for a monopolist will have a steeper slope (Fig. 12.11). This circumstance is important for the company, since marginal profitability is one of the factors that determines the amount of a given resource that the company will use.
But to make a decision to expand the use of a given resource in production, a company must not only know how the additional resource will affect the increase in its income. She always compares income with costs and estimates profit. Therefore, she must determine how the purchase and use of an additional resource will affect the increase in costs.

Rice. 12.11. Graph of the marginal profitability of a resource for a company under conditions of perfect and imperfect competition in the finished product market: MRP1, MRP2 - marginal returns, respectively, under the specified conditions;Qres — amount of resource used;Qres — resource price

Marginal cost of a resource

The increase in costs due to the introduction of an additional unit of a variable resource into production is called marginal cost of the resource. When a firm faces perfectly competitive conditions in a resource market, its marginal cost of a resource will be equal to the price of that resource.
For example, if a small firm wants to hire an accountant, he will be paid according to the market wage rate. Since the firm's demand is only a small fraction of the demand for accountants, it will not be able to influence their salary levels. The firm's marginal labor costs will look like a horizontal line (for example, see Figure 12.12).

How much resource should I use?

The principle of choosing the quantity of a resource used by a company is similar to the principle of determining the optimal volume of output. It will be profitable for a firm to increase the amount of a resource it uses to the point where its marginal return is equal to the marginal cost of that resource (Figure 12.12). In the example under consideration, with a resource price of 1000 rubles. a firm in conditions of perfect competition in the finished product market will use 6 units. of this resource (graph of the marginal profitability MRP1), and in conditions of imperfect competition - only 5 units. (graph of the marginal profitability of the resource MRP2).

Rice. 12.12. The optimal amount of resource used for a competitive firm and for a firm that is an imperfect competitor in the finished product market:MPR1 andMPR2 - marginal resource returns for a company under conditions of, respectively, perfect and imperfect competition in the finished product market; MSres - marginal cost per resource

We have determined how much of a variable resource the firm will use, provided that all other resources are constant. However, in practice, the company faces the question of how to combine the resources used to obtain maximum profit. In other words, she is faced with a situation where several resources are variable and it is necessary to determine in what combination to use them.

Selecting a resource combination option

The choice by the manufacturer of the combination of resources that ensures minimal costs is reminiscent of the choice of the consumer (see Chapter 9). From various sets of goods offered that bring him equal satisfaction, the consumer chooses one that suits his limited budget.
The manufacturer makes a choice from all the options for combining the resources used, with the help of which it is possible to produce a given amount of finished products, taking into account the prices of the resources. Let's assume that two interchangeable resources are used. For example, the company took upon itself the clearing of snow from city streets. For this purpose, she needs wipers and snow removal equipment. How many equipment and how many wipers does she need to complete a fixed amount of work at the lowest cost?
Let's build a graph showing all possible combinations of the number of cars and the number of wipers (Fig. 12.3). You can use 4 cars and 20 people, 2 cars and 40 people, 1 car and 80 people, as well as any other combination marked by any point on the curve. The curve has a curved shape: with an increase in the number of janitors, their marginal profitability will decrease, and, on the contrary, machines will increase. This is due to the well-known law of diminishing returns. The total income at all points will be the same and equal to the area of ​​the harvested territory multiplied by the cost of cleaning its unit (1 km2).

Rice. 12.13. Graph of possible options for combining two types of resources required to complete a given amount of work: K - number of snow removal machines;L - number of janitors

In order to make a decision on how many cars and wipers are needed to clean the streets, it is not enough for a company to know only their required number and number. It is necessary to take into account the costs the company will incur as a result of using different amounts of manual labor and machines, and determine the minimum. Costs depend on the price of snow removal equipment and the wages of janitors.
Let's assume that using one car will cost the company 20 thousand rubles, and hiring 10 janitors will cost 10 thousand rubles. The total amount of company costs associated with the purchase of machines and the hiring of janitors can be calculated using the formula:

C=KKK+LPL (12.3)

Where C is the total costs of the company, thousand rubles; K—number of cars, pcs.; RK - price of the car, thousand rubles; L is the number of janitors, tens of people; PL - the cost of hiring 10 janitors, thousand rubles.

Rice. 12.14. Possible combinations of two resources with the same total cost: K—number of snow removal machines;L - number of janitors

In Fig. Figure 12.14 shows three graphs corresponding to three options for the firm's total costs. For example, graph C1 shows all possible combinations of machines and manual labor, which cost 60 thousand rubles; C2—at 80 thousand and C3—at 100 thousand. The slope of the graphs depends on the ratio of the price of the car and the salary of the janitor.
To determine what costs will be minimal when performing a given amount of work, let’s compare the graphs presented in Fig. 12.13 and 12.14 (Fig. 12.15).
Curve in Fig. 12.15 clearly shows that neither at point A1 nor at point A3, the company’s costs will be minimal, they will amount to 100 thousand rubles, while at point A2 costs will be equal to 80 thousand rubles. In other words, the minimum costs will be achieved if the company uses two snow removal machines and hires 40 janitors.

Rice. 12.15. Graph of the combination of two resources that minimizes the firm's costs

How can a firm find this point without resorting to drawing graphs? Let us note that at point A2 the slope of the curve reflecting various combinations of the number of machines and the number of janitors required to perform a given job (see Fig. 12.13) and the straight line showing these combinations corresponding to a given amount of costs (see Fig. 12.14) , match up.
The slope of the curve reflects the ratio of the marginal returns of the factors of production used, and the slope of the straight line reflects the ratio of prices for these factors. From this we can conclude that the firm will minimize costs when the ratio of the marginal profitability of each resource to its price is equal:

where KRPK and KRPL are the marginal returns of the car and the janitor; PK and PL—the price of the car and the salary of the janitor
In other words, a firm will minimize its costs when the cost of producing an additional unit of output or performing an additional amount of work is the same, regardless of whether it uses a new set of windshield wipers or a new snow blower.
If the price of one of the factors changes, the firm will minimize costs with another combination of them.

conclusions

1. A pure monopoly assumes that one firm is the only producer of a given product that has no analogues. The monopolist has complete control over its price and output.
2. The reasons for monopoly are: a) economies of scale; b) legislative obstacles to the entry of new firms into the industry, patents and licenses; c) dishonest behavior, etc.
3. The demand curve for the products of a monopolist firm is sloping and coincides with the market demand curve. Costs and market demand are the constraints that prevent a monopolist from arbitrarily setting a high price for its products. Maximizing profit, he determines the price and volume of production based on the equality of marginal revenue and marginal cost. Since the monopolist's marginal revenue curve lies below the demand curve, it will sell at a higher price and produce less of it than under perfect competition.
4. The factor limiting monopoly power in the market is the elasticity of market demand. The higher the elasticity, the less monopoly power, and vice versa. The degree of monopoly power is also influenced by the number of firms in the market, concentration, and competitive strategy.
5. Monopoly reduces economic efficiency. Antitrust laws in different countries prevent the emergence and strengthening of monopoly power. Natural monopolies are the subject of government regulation. In natural monopoly industries, many enterprises are state property.
6. In real life, pure monopoly, as well as perfect competition, is quite rare. Real markets are very diverse and are characterized by conditions of monopolistic competition, gradually turning into oligopoly.
7. Under monopolistic competition, many small firms produce a variety of differentiated products; entry of new firms into the industry is not difficult. In the short run, firms choose the price and output that maximize profits or minimize losses. The easy entry of new firms into the industry leads to a tendency to obtain normal profits in the long run, when economic profits tend to zero.
8. Oligopolistic industries are characterized by the presence of several large firms, each of which controls a significant share of the market. A feature of oligopoly is the mutual dependence of the decisions of individual firms in the field of production volume and price. The entry of new firms into the industry is significantly difficult, and economies of scale make the existence of a large number of producers inefficient. There are different models that describe the behavior of oligopolists, including the Cournot model and the curved demand curve model. However, there is no single theory of oligopoly that could explain all the diversity of behavior of firms.
9. On the part of an individual firm, the demand for resources is determined by their marginal return. The marginal return of any variable resource decreases slowly according to the law of diminishing returns. The firm will expand the use of the resource until its marginal return is higher than its marginal cost, i.e. until the moment when these two indicators become equal.
In conditions where a firm's demand for a resource is a small fraction of the market demand for it, the marginal cost of the resource for a given firm is equal to its price.
10. The company strives to choose a combination of resources used that ensures minimal costs. This is possible if the marginal return of each resource is proportional to its price.

Terms and concepts

Monopoly (market) power
Price discrimination
Marginal profitability of a resource
Marginal cost of a resource

Self-test questions

1. What are the reasons for the emergence of a monopoly?
2. How are price and production volume determined under monopoly conditions?
3. What factors influence monopoly power? How does concentration of production affect monopoly power? In which of the two options is monopoly power higher: a) there are five firms in the market, each of which has an equal share in total sales; b) sales shares are distributed as follows: company 1 - 25%, 2-10%, 3-50%, 4-7%, 5-8%?
4. Why do monopolies resort to price discrimination? What conditions make it possible? How does price discrimination affect a monopoly's profits?
5. What are the similarities and differences between perfect and monopolistic competition? What are the advantages and disadvantages of monopolistic competition?
6. Why can we talk about a tendency to obtain normal profits in the long run for firms operating in conditions of monopolistic competition?
7. What are the main features of oligopoly?
8. Why is there no single theory that fully reflects the behavior of firms in the market? Why do they prefer non-price competition to price competition? What is Cournot equilibrium?
9. What type of market can be classified as: automotive industry, ferrous metallurgy, light industry, service sector?
10. What types of markets are formed in certain sectors of the Russian economy? It is often said that up to 80% of Russian mechanical engineering is monopolized. Is it so?
11. What determines the amount of resource used by a company?
12. What is the marginal return of a resource? What is the difference between the marginal returns of a resource for a competitive firm and a monopolist firm in the finished product market?
13. Suppose that the company is a monopolist in the finished goods market. How many workers will she hire at a wage rate of 1200 rubles?
How many workers would it employ in a perfectly competitive product market? The information required to answer the question is listed below:

What happens if the wage rate doubles?

Marginal Revenue

Marginal revenue (MR from the English marginal revenue) is the income received as a result of the sale of an additional unit of production. Also called additional income, this is the additional income to the total income of the company received from the production and sale of one additional unit of goods. It makes it possible to judge the efficiency of production, as it shows the change in income as a result of an increase in output and sales of products by an additional unit.

Marginal revenue allows you to evaluate the possibility of recoupment of each additional unit of output. In combination with the marginal cost indicator, it serves as a cost guide for the possibility and feasibility of expanding the production volume of a given company.

Marginal revenue is defined as the difference between the total income from the sale of n + 1 units of goods and the total income from the sale of n goods:

MR = TR(n+1) - TRn, or calculated as MR = ДTR/ДQ,

where DTR is the increment in total income; DQ - increment in output by one unit.

Perfect competition

Gross (total), average and marginal revenues of the company

This chapter assumes that a firm produces a single type of product. At the same time, in its behavior when making certain decisions, the company strives to maximize its profits. The profit of any company can be calculated based on two indicators:

• 1) total income (total revenue) received by the company from the sale of its products,
• 2) the total costs that the company incurs in the process of producing these products, i.e.

where TR is the total revenue of the company or total income; TC - the total costs of the company; P - profit.

In conditions of perfect competition, for any volume of output, products are sold at the same price set by the market. Therefore, the average income of the firm is equal to the price of the product.

For example, if a company sold 10 units of products at a price of 100 rubles. per unit, then its total income will be 1000 rubles, and the average income will be 100 rubles, i.e. it is equal to the price. Moreover, the sale of each additional unit of product means that total income increases by an amount equal to the price. If a company sells 11 units, then an additional unit of this product will bring it an additional income of 100 rubles, which is again equal to the price of a unit of product. It follows that under conditions of perfect competition the equality P = AR = MR is maintained.

Let's illustrate this equality with our example, presenting it in the form of table 1-5-1.

Table 1-5-1 - Total, average and marginal revenue of the company.

Table 1-5-1 shows that sales growth from 10 units. up to 11 units, and then up to 12 units. at a price of 100 rub. per unit does not change average and marginal income. Both remain equal to 100 rubles, i.e. the price of 1 unit.

Now let's present the average and marginal income of the company in the form of a graph (Fig. 1-5-1). He assumes that sales volume (Q) is plotted on the abscissa axis, and all cost indicators (P, AR, MR) are plotted on the ordinate axis. In this case, the average and marginal income of the company, as has already been established, remains constant for any value of Q - 100 rubles. Therefore, the average income curve and the marginal income curve coincide. Both of them are represented by one line parallel to the x-axis.

rice. 1 -5-1

As for the total income curve, it represents a ray emanating from the origin of the coordinate system (a line with a constant positive slope - see Fig. 1-5-2). The constant slope is explained by the constant price level of the product.

rice. 1 -5-2

Consideration of the total, average and marginal income of a company does not tell us anything about the profit that the company hopes for. Meanwhile, any company not only expects to make a profit, but also strives to maximize it. It would be wrong, however, to assume that profit maximization is based on the principle “the greater the output, the greater the profit.” In order to get maximum profit, the company must produce and sell the optimal volume of products.

There are two approaches to determining optimal output. Let's consider them using the example of a conventional company selling products at a price of 50 rubles. for a unit.

The first approach to determining the optimal volume of a firm's output is based on comparing total income with total costs. In order to show what this approach consists of, let us first turn to Table. 1-5-2.

Table 1-5-2

First, costs exceed income (the company suffers losses). Graphically, this situation is expressed in the fact that the TC curve is located above the TR curve. When producing 4 units of output, the TR and TC curves intersect at point A. This indicates that total costs are equal to total income (the company receives zero profit). The TR curve then passes above the TC curve. In this case, the company makes a profit, which reaches its maximum value when producing 9 units of output. With a further increase in production, the absolute value of profit gradually decreases, reaching zero when 12 units are produced (the TR and TC curves intersect again). The firm then enters an area of ​​unprofitable operations. Thus, critical production points should be established.

In Fig. 1-5-3 are points A (Q = 4) and B (Q = 12). If a firm produces products in a volume that is represented by values ​​located between these points, it makes a profit. Beyond the specified volumes, it suffers losses.

rice. 1 -5-3

The profit curve (P) reflects the ratio of the TR and TC curves. When the firm suffers losses (profit is negative), the P curve is located below the horizontal axis. It crosses this axis at critical volumes of output (points A" and B") and passes above it when a positive profit is received.

The optimal output level is the output at which the firm maximizes profit. In this example it is 9 units of product. At Q - 9, the distances between the TR and TC curves, as well as between the P curve and the horizontal axis, are maximum.

Now consider another approach to determining the optimal level of output and the equilibrium state of a competitive firm. It is based on comparing marginal revenue with marginal cost. In order to determine the optimal output, it is not necessary to calculate the amount of profit for all production volumes. It is enough to compare the marginal revenue from the sale of each unit of product with the marginal costs associated with the production of this unit. If marginal revenue (under perfect competition MR = P) exceeds marginal costs, then production should be increased. If marginal costs begin to exceed marginal revenue, then further increases in production should be stopped.

Let us turn again to the example presented in Table. 1-5-2. Should the firm produce the first unit of product? Of course, since the marginal income from its implementation (50 rubles) exceeds the marginal costs (48 rubles). In the same way, it must produce the second unit (MC = 38 rubles). In the same way, the marginal revenue and marginal costs associated with the production of each subsequent unit are compared. We make sure that the ninth unit of the product should be produced. But already the costs associated with the production of the tenth unit (MC = 54 rubles) exceed the marginal income. Consequently, by releasing the tenth unit, the firm will reduce the amount of profit received, which consists of the excess of marginal revenue over the marginal cost of releasing each previous unit of product. From this we can conclude that the optimal volume of production for this company is 9 units. With this output, marginal revenue equals marginal cost.

The behavior of the company at various ratios of marginal revenue and marginal costs is presented in Table. 1-5-3.

Table 1-5-3

Thus, the rule for determining the optimal output of a firm when the product price is equal to the marginal product is expressed by the equality

Since under conditions of perfect competition price is equal to marginal revenue (P = MR), then

P = MS, i.e.

Equality of product price to marginal cost is a condition for equilibrium of a competitive firm.

Determining the optimal level of product output by a company based on the second approach can also be done graphically (Fig. 1-5-4).

rice. 1 -5-4

Conclusion

Gross (total) income (TR) is the product of the price of a product by the corresponding quantity of products sold.

In conditions of perfect competition, the firm sells additional units of output at a constant price, so the gross income graph looks like a straight ascending line (in this case, gross income is directly proportional to the volume of products sold).

Under imperfect competition, a firm must lower its price to increase sales. In this case, gross income on the elastic part of demand increases, reaching a maximum, and then - on the inelastic part - decreases.

Marginal revenue (MR) is the amount by which gross income changes as a result of an increase in the quantity of products sold by one unit.

In a perfectly competitive market with perfectly elastic demand, marginal revenue is equal to average revenue.

Imperfect competition gives the firm a downward-sloping demand curve. In such a market, marginal revenue is less than both average revenue and price.

Average revenue (AR) is the average revenue from the sale of a unit of goods. It is calculated by dividing total income by the volume of products sold.

According to basic economic principles, if a company lowers the price of its products, then that company can sell more products. However, this will generate less profit for each additional unit sold. Marginal revenue is the increase in revenue resulting from the sale of an additional unit of output. Marginal revenue can be calculated using a simple formula: Marginal revenue = (change in total revenue)/(change in number of units sold).

Steps

Part 1

Find the quantity of products sold. To calculate marginal revenue, it is necessary to find the values ​​(exact and estimated) of several quantities. First, you need to find the number of goods sold, namely one type of product in the company’s product range.

• Let's look at an example. A certain company sells three types of drinks: grape, orange and apple. In the first quarter of this year, the company sold 100 cans of grape juice, 200 of orange and 50 of apple. Find the marginal revenue for orange drink.
• Please note that in order to obtain the exact values ​​​​of the quantities you need (in this case, the quantity of goods sold), you need access to financial documents or other reporting of the company.

1. Find the total revenue received from the sale of a particular type of product. If you know the unit price of an item sold, you can easily find total revenue by multiplying the quantity sold by the unit price.

   Determine the unit price that should be charged to sell an additional unit of product. In tasks, such information is usually given. In real life, analysts try to determine such a price for a long time and with difficulty.

   • In our example, the company reduces the price of one can of orange drink from $2 to $1.95. For this price, the company can sell an additional unit of orange drink, bringing the total number of units sold to 201.

2. Find the total revenue from selling the goods at the new (presumably lower) price. To do this, multiply the quantity of goods sold by the price per unit.

   • In our example, the total revenue from selling 201 cans of orange drink at $1.95 per can is: 201 x 1.95 = $391.95.

3. Divide the change in total revenue by the change in quantity sold to find marginal revenue. In our example, the change in the quantity of products sold: 201 – 200 = 1, so here to calculate the marginal revenue, simply subtract the old value of total revenue from the new value.

   • In our example, subtract the total revenue from selling the product at $2 (per unit) from the revenue from selling the product at $1.95 (per unit): 391.95 - 400 = - $8.05.
   • Since in our example the change in the quantity of products sold is 1, here you do not divide the change in total revenue by the change in the quantity of products sold. However, in a situation where a price reduction results in the sale of multiple units (rather than just one), you would have to divide the change in total revenue by the change in quantity sold.

   Part 2

   Using the Marginal Revenue Value

   1. Product prices should be such as to provide the greatest revenue with an ideal ratio of price and quantity sold. If a change in unit price causes marginal revenue to be negative, the company suffers a loss, even if the price reduction allows it to sell more products. The company will make additional profit if it raises the price and sells less product.

      • In our example, the marginal revenue is -$8.05. This means that if the price is reduced and an additional unit of product is sold, the company incurs losses. Most likely, in real life the company will abandon plans to reduce prices.

   2. Compare marginal cost and marginal revenue to determine a company's profitability. For companies with an ideal price-quantity ratio, marginal revenue equals marginal cost. Following this logic, the greater the difference between total costs and total revenue, the more profitable the company.

      Companies use marginal revenue to determine the quantity to produce and the price at which the company will earn maximum revenue. Any company strives to produce as many products as can be sold at the best price; overproduction can lead to expenses that will not be recouped.

   Part 3

   Understanding different market models

   1. Marginal revenue under perfect competition. In the above examples, a simplified model of the market was considered, when there is only one company on it. In real life everything is different. A company that controls the entire market for a certain type of product is called a monopoly. But in most cases, any company has competitors, which affects its pricing; In conditions of perfect competition, companies try to set minimum prices. In this case, marginal revenue, as a rule, does not change with changes in the number of products sold, since the price, which is minimal, cannot be reduced.

      • In our example, let's assume that the company in question competes with hundreds of other companies. As a result, the price for a can of drink decreased to $0.50 (a price reduction would lead to losses, and an increase would lead to a decrease in sales and the closure of the company). In this case, the number of cans sold does not depend on the price (since it is constant), so the marginal revenue will always be $0.50.

   2. Marginal revenue under monopolistic competition. In real life, small competing firms do not respond quickly to price changes, they do not have complete information about their competitors, and they do not always set prices to maximize profits. This market model is called monopolistic competition; many small companies compete with each other, and since they are not “absolute” competitors, their marginal revenue may decrease as they sell an additional unit of output.

      • In our example, let's assume that the company in question operates under conditions of monopolistic competition. If most drinks sell for $1 (per can), then the company in question might sell a can of the drink for $0.85. Let's say that the company's competitors do not know about the price reduction or cannot react to it. Similarly, consumers may not be aware of a lower priced drink and continue to purchase $1 drinks. In this case, marginal revenue tends to fall because sales are only partially determined by price (they are also determined by the behavior of consumers and competing firms).