Profits is for any entrepreneur's goal against which to measure the effectiveness of economic activity.Producers intend to maximize the financial result, which depends on many factors: cost, production volume, number of resources, and combinations thereof.The primary task of an economist at the company - finding the volume at which the financial results will be satisfactory.To do this, you must follow the rules of profit maximization, which are based on the ratio of marginal revenue and expenses.
revenue and profits
financial resources which remain available to the company after deduction of the economic costs of revenue, equate to profits.The price of products and the amount of direct influence on the amount of total revenue, or gross revenue (TR).That is earnings (P) of the enterprise is the difference between TR and TC, where TC - gross (total) costs.
Comparing the gross figures of income and expenses, we get different amounts of profit:
- provided that the TP & gt;TC, the profit is above 0;
- if, on the contrary, the TP & lt;TC, the profit is negative;
- if TR = TC, then P = 0 (a condition where the company does not make a profit, but bears no losses).
Through the production of goods (goods and services), an economic entity seeks to increase profits.Profit maximization - the definition of the optimum volume of production of these goods.
Determining the optimal amount of
There are two approaches to the identification of the number of products / services in which the activity of the economic entity will be effective.Terms of profit maximization:
- produces products to the extent in which the difference between the indices of TR and TS reaches the maximum value.
- When comparing the income limit values (MR) and expenses (MS) must hold their equality.
To understand the second condition, it is necessary to recall or learn the definition of marginal costs and income.
Marginal revenue and expenses
Marginal revenue - additional (extension) the result of the company from the sale of each additional unit of the commodity.The value of MR is the ratio of gross revenue (ΔTR) in addition to the one issued by the good - the goods / services (ΔV).
determine the marginal cost, how much more will need to spend resources to produce an additional unit of output.
That is, each additional unit of the commodity, the marginal cost is less than the limit of income must be made as of each such unit sold, the company will receive the income greater than the cost of resources.Once the MR = MC, it should stop the increase in volume, as in this equality is attained the highest profit of the firm.Terms of maximizing profits achieved.
minimize losses
previously considered conditions of profit maximization, which are executed when the optimum output, give one result.That is, if the same company to determine the optimum amount of the issue, then using the first or second condition is achieved the same amount of volume.
When a producer of economic losses have to also set the output at which the losses are lowest.This is possible under the condition that the difference between total costs and revenues will be minimal.
minimize losses of the company reached when the price of the last unit of volume equal to marginal cost.But the price should not exceed the average total cost (ATC) and must be higher than the average variable costs (ABC).With perfect competition, where the producer can not affect the cost of goods, MR (marginal revenue) is equivalent to the price (P) per unit.Then MR = MC = P if ABC & lt; P & lt; ATS.
market price and the average cost
So, for the rule of profit maximization in conditions of perfect competition is characterized by the equality MR = MC = P.In the equation, there is a price that must be compared with the cost to extract economic profit.
average costs (AC) are defined as the gross expenditure and output.They come in three types:
- PBX - gross;
- ABC - variable;
- APS - permanent.
Value with costs:
- P & gt;ATS - a case in which achieved economic profit of the firm.Terms of profit maximization is such that revenues above costs.
- P = ATC.The company covers its costs, without receiving financial benefits.
- P & lt;ATS is typical for damages.
- ABC & lt; P.
profit in conditions of imperfect competition
If the market situation when the producers can control the price, the demand is reduced, and then change the rules of profit maximization.Before the manufacturer raises the question: to reduce the price or reduce output.
But with imperfect competition, the more sales, the lower the price of goods, and each extra unit of production is sold at a low price.That is to sell an additional unit, the manufacturer reduces the price.On the one hand, creating the effect of increasing the implementation, on the other hand, the company suffers losses, as buyers pay less.
relative loss reduces the marginal revenue (MR), which does not coincide with the selling price.Ways to maximize profits under perfect and, on the contrary, imperfect competition have a common condition MR = MC.But in each case has its own characteristics, which can be considered in the study of types of imperfect markets.
profit under monopoly
market in which a manufacturer sells goods having no similar samples with a similar set of characteristics is called a monopoly.The lack of competition - the main condition of monopoly.In practice, especially at the global and national level, such a market model is rare, but it occurs at the local level.
Shopping compelled to force the buyer to buy it at a price set by the manufacturer, or opt out of it.But if the price is too high, the purchasing power will be reduced.Therefore, the aim of maximizing profits for the monopolist is not only the determination of the volume, but also the establishment of the price of the goods, in which all products are produced now will be realized.
For high rates of profit is a mandatory condition: P & gt; MR = MC.First, the well-known equality MR = MC the firm-monopolist sets the optimal volume of output goods, and then comparing the income limit to the price, it sets the value of the equation P & gt; MR.
Gain on oligopoly
small number of large firms that compete with each other, is characteristic of an oligopoly.The close relationship of firms affects their behavior in setting prices.The strategy of the competitors - a fundamental factor in determining the prices of goods and production volume.
In this type of market structure does not apply equality MR = MC at which the optimum size and achieve high profits.Profit maximization under oligopoly:
- product differentiation;
- improve quality;
- unique design;
- improving service levels.
Long term
Profit maximization in the short term is presented in the above examples.For the long term, there are the features increase profits:
- time factor;
- likelihood of the emergence of new businesses or, on the contrary, their reduction;
- price change.
situation when the value of the goods above average total cost (ATC), helping to attract new competitors in the industry.However, the sharp increase in firms leads to an increase in the volume of goods in the market, and this is a direct way to reduce prices, which is lowered to the level of the exchange.Fear of incurring losses resulting in an outflow of companies from the industry, and develops a reverse trend.
decline in prices leads to a leveling of gross income up to the level of total costs, the net profit is reduced, but accounting profit remained stable.This allows companies to continue operations in the long term without changing the production to the increase in demand, which will draw to an increase in prices and create conditions for profit maximization: P & gt; ATC.
In an industry that is characterized by rising costs, the situation is different: it is simply discourages new firms to go with their products on the market, if the price of losing.In the case of pricing, higher than the average gross expenditure and ensuring a stable demand, there are all the possibilities to implement the rules of profit maximization.
