Marginal revenue and marginal revenue. Monopoly equilibrium. Accounting profit is equal to the difference...

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 produced and sold products. 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 . 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 revenue and marginal cost for the commodity producer is important in developing his 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, fuel costs, 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.

For any price reduction, an area similar to the area ABC in Fig. 2, equals Q 1 (Dр). This is the income lost when a unit of goods is not sold at a higher price. Square DEFG equals P 2 (DQ). This is the increase in income from the sale of additional units of a good minus the income that was sacrificed by giving up the opportunity to sell previous units of the good at higher prices. For very small changes in price, changes in total revenue can therefore be written as

where Dр is negative and DQ is positive. Dividing equation (2) by DQ, we get:

(3)

where Dр/DQ is the slope of the demand curve. Since the demand curve for a monopolist's product is downward sloping, marginal revenue must be less than price.

The relationship between marginal revenue and the slope of the demand curve can be easily converted into a relationship that relates marginal revenue to the price elasticity of demand. The price elasticity of demand at any point on the demand curve is

Substituting this into the marginal revenue equation, we get:

Hence,

(4)

Equation (4) confirms that marginal revenue is less than price. This is true because E D is negative for a downward sloping demand curve for the monopolist's output. Equation (4) shows that, in general, the marginal revenue of any output depends on the price of the good and the elasticity of demand with respect to price. This equation can also be used to show how total income depends on market sales. Let's assume that e D = -1. This means unit elasticity of demand. Substituting e D = -1 into equation (4) gives zero marginal revenue. There is no change in total income in response to a change in price when the price elasticity of demand is -1. Likewise, when demand is elastic, the equation shows that marginal revenue is positive. This is so because the value of e D would be less than -1 and greater than minus infinity when demand is elastic. Finally, when demand is inelastic, marginal revenue is negative. Table 1.2.2 summarizes the relationships between marginal revenue, price elasticity of demand, and total revenue.

TABLE 1.2.2. Marginal revenue, total revenue, and price elasticity of demand for a product

You can see that the relationship implied by equation (4) is logical by analyzing how total revenue along the linear demand curve and the corresponding marginal revenue curve for the monopoly vary along with the quantity demanded by the buyer. Recall that demand is price elastic when a reduction in price leads to an increase in total income. If total revenue increases when price decreases, then marginal revenue must be positive. Thus, whenever the marginal revenue from a price decrease is positive, demand is price elastic. This is so because negative marginal revenue implies that a decrease in price leads to a decrease in total revenue. Finally, when marginal revenue is zero, a change in price does not change total revenue and demand has unit elasticity. This is shown at the bottom of Fig. 3. Maximum total revenue is extracted when marginal revenue is zero. At this point on the linear demand curve, the price elasticity of demand is -1.

Equation (4) also implies that the more elastic demand is, the smaller the difference between marginal revenue and price. In the extreme case, if demand is infinitely elastic, then the difference between price and marginal revenue becomes zero. This is so because the value of 1/E D in equation (4) tends to zero if E D tends to minus infinity. This is consistent with the fact that for a competitive firm, price equals marginal revenue.

We also note from the table. 1.2.1 and according to the graphs in Fig. 2 and 3 that marginal revenue falls faster than price as the monopolist produces more of the good. For a linear demand curve, marginal revenue will fall at exactly twice the rate of price. Note that for every $100,000 reduction in the price charged per concert, after the first concert, the marginal revenue always decreases by $200,000. Marginal revenue becomes zero at the level of output corresponding to half the quantity of goods (services) that would be sold at a price equal to zero. (For a linear demand curve, the slope of the curve is constant. From equation (3) it can be seen that the change in marginal revenue in response to any change in Q is such that:

D mR/ DQ = D [P + Q( D R/ DQ )] / DQ = (Dр + DQ(DP/DQ))/DQ = 2(DP/DQ). The rate of change of MR relative to Q is twice the rate of its change relative to Q.

Rice. 3. Demand for a monopolist, marginal revenue, total revenue and elasticity

With a linear demand curve, when more of a good is sold, marginal revenue falls at twice the rate of price. When marginal revenue is positive, total revenue increases as price decreases. When marginal revenue is negative, total revenue falls whenever the price decreases. Total revenue is maximum when marginal revenue MR = 0. When MR > 0, demand is elastic. When M.R.< 0, спрос является неэластичным. Спрос обладает единичной эластичностью, когда МR = 0, а общий доход в этой точке достигает максимума.

Profit maximization by monopoly firms in the short run

A competitive firm maximizes profit by adjusting the quantity sold at the market price so that the marginal cost of production equals the marginal revenue. Although a monopoly can influence the price of its product, the marginal analysis of profit maximization is the same under both competition and a monopoly. Profit maximization implies that marginal revenue must equal marginal cost of the quantity produced. However, the monopolist's marginal revenue from additional output is always less than the price at which this quantity is sold. (For a company with monopoly power the price it can charge is a function of the quantity of goods offered for sale, Q. Profit is p = PQ - TC, since P = f(Q) and TC = f(Q), dp/dQ=P+Q( dP/dQ)-dTC/dQ. Assuming that necessary condition existence of the second derivative is satisfied, the maximum profit is achieved where [P + Q (dP/dQ)]=dTC/dQ. The left side of the equation is marginal revenue. This marginal revenue expression is similar to equation (3) for cases where changes in Q are infinitesimal. The right side of the equation represents marginal cost.)

Table 1.3.1 provides data on the costs of a concert performance. The total cost per year for all performances is shown in the third column of the table. The fourth column shows the average cost per performance. Marginal cost is calculated in the fifth column as the change in total cost from each additional submission. The sixth column reproduces the data on marginal income from table. 1.2.1. Fixed (economic - Ed.) costs are equal to $100,000 per year. They consist of depreciation and interest (forgone interest on the provision of the corresponding funds on a loan, for example, when investing them in a bank. - Ed.) on durable equipment - such as musical instruments, sound equipment, costumes, vehicles used for transporting personnel and equipment (including bodyguards). Even if there are no concerts at all for a year, you still bear these costs. The last column is total profit, therefore indicating that if you decide not to play any concerts, you will lose $100,000 per year. If you price your shows at more than $1 million each, there will be no buyers for them. You will therefore lose an amount equal to your fixed costs.

If your price is $1 million, you will find a buyer for one show per year. Total costs will be $500,000. You will therefore make $500,000 in profit from this gig. The marginal cost of the first concert is $400,000. They are equal to the average variable costs of this gig. They consist of the salaries paid to your assistants, accompanists, bodyguards who protect you on the road, and the cost of fuel for the transport in which you move from one place to another. The maximum income from the first concert is $1 million. The marginal profit indicated in the penultimate column of the table. 10.3 is therefore equal to $600,000. As a reminder, marginal benefit is the difference between marginal revenue and marginal cost.

After the first show, marginal revenue falls below price because you have to lower your target price to be able to perform more shows. Gross income from two concerts, according to table. 10.3, equals 1.8 million dollars. You must value your concerts at $900,000 each if you want to sell two shows a year to the promoters.

Total costs for two concerts are equal to 1 million dollars. The marginal cost of the second concert is therefore $1 million less $500,000 divided by one. This gives marginal cost. Since the marginal benefit from the second gig is $800,000, your marginal benefit is positive. In this case, your marginal profit is $300,000, and your total profit increases from $500,000 per year to $800,000.

As long as marginal revenue exceeds marginal cost of the gig, profits increase. Profit begins to decline as soon as marginal cost exceeds marginal revenue. You will increase your annual profits if you increase your concert output per year. This is true because the marginal cost of the third concert is $550,000, while its marginal revenue is $600,000. Your marginal profit for the third gig is therefore $50,000, and your total profits increase to $850,000 per year. If you wanted to do three concerts a year, then you would have to value each of them at $800,000.

Are you interested in lowering your price below $800,000? If you brought the price down to $700,000, you could do four shows a year. But this shouldn't be done. The marginal cost of the fourth concert would be $700,000, but its marginal revenue would be only $400,000. Your marginal profit would be,

TABLE 1.3.1 Costs and determination of the volume of commodity output of a profit-maximizing monopoly

hence $300,000. By lowering your price to $700,000, you would reduce your profits from $850,000 to $550,000 per year.

As indicated in table. 1.3.1, for any output greater than three concerts per year, marginal cost will exceed marginal revenue. Your equilibrium price is therefore $800,000 per gig. The amount of equilibrium output that will be demanded at this price is three. Profits at this price are $850,000 per year. The marginal cost of the concert at this output is $550,000. Therefore, at equilibrium output, marginal cost is less than price. This follows from the fact that the marginal revenue under a monopoly is less than the price.

Conditions for maximizing profit at perfect competition.

ANSWER

According to the traditional theory of the firm and the theory of markets, profit maximization is the main goal of the firm. Therefore, the company must choose the volume of products supplied to achieve maximum profit for each sales period.

PROFIT is the difference between gross (total) income (TR) and total (gross, total) production costs (TC) for the sales period:

profit = TR – TS.

Gross income is the price (P) of the product sold multiplied by the sales volume (Q).

Since the price is not influenced by a competitive firm, it can only influence its income by changing sales volume. If a firm's gross revenue is greater than total costs, then it makes a profit. If total costs exceed gross income, the firm incurs losses.

Total costs is the cost of all factors of production used by a firm to produce a given volume of output.

Maximum profit achieved in two cases:

a) when gross income (TR) exceeds total costs (TC) to the greatest extent;

b) when marginal revenue (MR) equals marginal cost (MC).

Marginal Revenue (MR) is the change in gross income received from the sale of an additional unit of output. For a competitive firm, marginal revenue is always equal to price product:

Marginal profit maximization is the difference between marginal revenue from selling an additional unit of output and marginal cost:

marginal profit = MR – MC.

Marginal cost– additional costs leading to an increase in output by one unit of good. Marginal costs are entirely variables costs, because fixed costs do not change with release. For a competitive firm, marginal cost is equal to the market price of the product:

The limiting condition for maximizing profit is the volume of output at which price equals marginal cost.

Having determined the limit for maximizing the firm's profit, it is necessary to establish the equilibrium output that maximizes profit.

Maximum Profitable Equilibrium This is the position of the firm in which the volume of goods offered is determined by the equality of the market price to marginal costs and marginal revenue:

The maximum profitable equilibrium under perfect competition is illustrated in Fig. 26.1.

Rice. 26.1. Equilibrium output of a competitive firm

The firm chooses the volume of output that allows it to make maximum profit. At the same time, it must be borne in mind that the output that ensures maximum profit does not at all mean that the largest profit is made per unit of this product. It follows that it is incorrect to use profit per unit as a criterion for overall profit.

In determining the profit-maximizing output level, it is necessary to compare market prices with average costs.

Average costs (AC)– costs per unit of production; equal to the total cost of producing a given quantity of output divided by the quantity of output produced. Distinguish three type of average costs: average gross (total) costs (AC); average fixed costs (AFC); average variable costs(AVC).

The relationship between market price and average production costs can have several options:

The price is greater than the profit-maximizing average cost of production. In this case, the company extracts economic profit, that is, its income exceeds all its costs (Fig. 26.2);

Rice. 26.2. Profit maximization competitive firm

The price is equal to the minimum average production costs, which ensures the company’s self-sufficiency, that is, the company only covers its costs, which gives it the opportunity to make a normal profit (Fig. 26.3);

Rice. 26.3. Self-sustaining competitive firm

The price is below the minimum possible average costs, i.e. the company does not cover all its costs and incurs losses (Fig. 26.4);

Price falls below minimum average cost but exceeds minimum average cost variables costs, i.e. the company is able to minimize its losses (Fig. 26.5); price below minimum average variables costs, which means the cessation of production, because the company’s losses exceed fixed costs (Fig. 26.6).

Rice. 26.4. Competitive firm incurring losses

Rice. 26.5. Minimizing losses of a competitive company

Rice. 26.6. Cessation of production by a competitive firm