Choose the correct answer.
1. Marginal costs are ...
1. maximum production costs
2. average cost of producing a product
3. costs associated with the release of an additional unit of output
4. minimum costs for product release
2. The cost of producing a unit of output is ...
2. average costs
3. average income
4. total variable costs
3. Which of the listed types of costs are absent in long term …
1. fixed costs
2. variable costs
3. general costs
4. distribution costs
4. K variable costs includes costs associated with...
1. with an increase in total costs
2. with a change in the volume of production
3. only with internal costs
4. with the increase of fixed capital
Economic profit is less than accounting profit
by the size...
1. external costs
2. internal costs
3. fixed costs
4. variable costs
6. Variable costs include ...
1. depreciation
3. interest on the loan
4. salary
7. Normal profit, as a reward for entrepreneurial talent, is included in ...
1. economic profit
2. internal costs
3. external costs
4. rent payments
8. The purchase by an enterprise of raw materials from suppliers refers to ...
1. to external costs
2. to internal costs
3. to fixed costs
4. to distribution costs
9. Accounting profit is equal to the difference ...
1. between gross income and internal costs
3. between external costs and normal profit
A typical example variable costs(costs) for the firm
serve...
1. raw material costs
2. expenses for management personnel
3. salary costs for support staff
4. fee for a business license.
11. If the long-term average costs (costs) of producing a unit of output decrease as the volume of production increases:
1. there is a negative scale effect
2. there is a positive scale effect
3. there is a constant scale effect
4. data is not enough.
12. Suppose that an entrepreneur, having his own premises and funds, organized a repair shop household appliances. After working for several months, he found that his accounting profit was 357 monetary units, and normal - 425 (for the same period). AT this case economic solution
entrepreneur...
1. efficient
2. inefficient.
13. The total cost of production is ...
1. costs associated with the use of all resources and services for the production of products
2. explicit (external) costs
3. implicit (internal) costs, including normal profit
4. the costs of the commodity producer associated with the acquisition consumer goods durable.
14. External costs are ...
1. costs associated with the acquisition of resources and services for the production of products
3. expenses for the purchase of raw materials and materials in order to replenish production stocks
4. proceeds from the sale of manufactured products.
15. Internal costs include ...
1. expenses for the purchase of raw materials and materials for the production of products
2. costs of resources owned by the enterprise
3. expenses associated with the acquisition of a plot of land by an enterprise
4. rent for the equipment used.
16. Economic profit is equal to the difference ...
1. between gross income and external costs
2. between external and internal costs
3. between gross income and total costs
4. between accounting and normal profit.
17. Accounting profit is equal to the difference ...
1. between gross income and internal costs;
2. between total revenue and depreciation
3. external costs and normal profit
4. between gross income and external costs.
Marginal revenue is equal to the price of a good for a producer acting
in conditions …
1. oligopoly
4. pure monopoly
19. Fixed costs include all the costs listed below, except ...
1. cushioning
3. percent
4. wages;
5. administrative and management expenses.
20. Variable costs include all the costs listed below, except ...
1. salary
2. the cost of raw materials and materials
3. cushioning
4. Electricity fees
21. The cost of producing a unit of output is …
1. general costs
2. average costs
3. average income
4. total variable costs.
22. The increase in the product caused by the attraction of an additional unit of the resource is called ...
1. marginal cost
2. marginal income
3. marginal product
4. marginal utility.
23. Under the law of diminishing productivity (return), production costs for each subsequent unit of production ...
1. decrease
2. increase
3. stays the same
4. decrease if average fixed costs decrease.
24. The difference between revenue and resource costs is ...
1.balance profit
2. accounting profit
3. normal profit
4. economic profit.
Every firm strives to get maximum profit. Its size depends on maximizing the difference between the company's income and costs. Therefore, the second element (along with costs) that determines profit is the income received by the company from the sale of its products. They act as the most important economic indicator the work of enterprises (firms) and other organizations, reflecting their financial receipts from all types of activities.
In a market economy, represented by the movement of commodity-money flows, income always appears in the form of a certain amount of money. Income is the monetary value of the performance of a firm (or individual individual) as a subject market economy. This is the amount of money that comes to her direct disposal. It reflects the economic performance economic activity firms. This means that the condition for receiving cash income is effective participation in the economic life of society. The very fact of receiving it is an objective evidence of such participation, and its size is an indicator of the scale of this participation.
The desire to maximize one's income dictates the economic logic of behavior for any market entity. It acts as ultimate goal and powerful incentive entrepreneurial activity.
The receipt by the firm of income indicates the sale of products, the expediency of the costs incurred, and the public recognition of the consumer properties of the product.
According to the types of costs of the company, revenues are also divided. Therefore, it is customary to allocate total, average and marginal income.
Total (cumulative, gross) income is the amount of money received from the sale of a certain amount of
vara. It is determined by multiplying the price of a good by the corresponding quantity of output that the firm is able to sell, and can be expressed by the corresponding formula:
TR = Р Q, where TR is total revenue;
P is the price of a unit of production;
Since, under conditions of pure (perfect) competition, the firm sells products at a constant price, then, consequently, its income will be directly proportional to the number of products sold (the more products sold, the greater the income). In other words, the gross income of the firm will increase in this case by a constant amount for each additional unit of goods sold (Table 11.1).
Table 11.1. Firm's earnings under pure competition
| Unit price (P) | | Total Revenue (TR) | Income Growth (MR) |
| 5 | 0 | 0 | 0 |
| 5 | 1 | 5 | 5 |
| 5 | 2 | 10 | 5 |
| 5 | 3 | 15 | 5 |
| 5 | 4 | 20 | 5 |
| 5 | 5 | 25 | 5 |
Since the demand curve for a product under perfect competition is perfectly elastic, each additional unit sold increases gross income by the same amount (in our example, by 5 monetary units). Graphically, it is depicted by a straight ascending line (Fig. 11.1).
In contrast to pure competition under conditions imperfect competition sales volume affects market price goods (with an increase in sales, it decreases), therefore, the total income of the company does not grow in proportion to the products sold, but at a slower pace, since additional income in this case tends to decrease (Table 11.2).
Table 11.2. The total income of a firm under imperfect competition
| Unit price (P) | Units sold (Q) | Total income (TR) | Growth income |
| 6 | - | - | - |
| 5 | 1 | 5 | 5 |
| 4 | 2 | 8 | 3 |
| 3 | 3 | 9 | 1 |
| 2 | 4 | 8 | -1 |
| 1 | 5 | 5 | -3 |
The table shows that not only the quantity of goods sold, but also the size of the total income of the company depends on the value of the price. At the same time, the maximum gross income is not provided by the highest price (in our example, 5 den. units).
According to the table, you can build a graph showing the dynamics of the total income of the company in conditions of imperfect competition (Fig. 11.2).
As can be seen from the graph, two parts can be distinguished in the change in total income (TR). First, it grows and reaches its maximum value at point E, and then begins to decline. The total income increases as long as the additional
0123456Q Fig. 11.2. The firm's total income curve under imperfect competition
the income from the sale of a new unit of goods is a positive value. Wherein maximum income(9 den. units) the company receives not at the maximum selling price (5 den. units), but at a price of 3 den. units Therefore, the firm's optimal sales volume will be three physical units at a price of 3 den. units
Average income (AR) is the proceeds from the sale of a unit of production, i.e. is the gross income per unit of goods sold. It acts as the price per unit for the buyer and as income per unit for the seller.
Average revenue is the quotient of total revenue (TR) divided by the number of products sold (Q). It can be expressed by the following formula:
where AR is average revenue;
TR - total income;
Q - the number of products sold.
At a constant price (in conditions of pure competition), the average income is equal to the selling price, as can be seen from the above formula, which can be transformed as follows:
AR == --= P .
QQ
Therefore, the price and average income, according to Western economists, act as one and the same phenomenon, which is considered only from different points of view. It makes sense to calculate the average income for certain period only if the prices for manufactured homogeneous products change or if the firm focuses on the production of a number of products, models, etc.
Under conditions of perfect competition (when the price is assumed to be constant), the average income graph looks like a straight line parallel to the x-axis, i.e. horizontal line (Fig. 11.3).
In conditions of imperfect competition (when the price tends to fall with the growth of sales), the average income of the firm decreases. Graphically, this is depicted as a descending line (Fig. 11.4).
Marginal revenue (MR) is the additional (additional) income to the firm's gross income received from the production and sale of one more unit of goods. It refers to the limiting characteristics of the goods being sold and makes it possible to judge the effectiveness of the sale.
Production, as it shows the change in income as a result of an increase in output and sales of products.
Marginal revenue allows you to evaluate the possibility of payback for each additional unit of output. Combined with indicator marginal cost it serves as a cost benchmark for the possibilities and expediency of expanding the volume of production. Therefore, whenever a firm intends to change its output, it must calculate how its income will change as a result of this change and how much additional income will be from the sale of one more unit of output.
Marginal revenue measures the change in total revenue resulting from the sale of an additional unit of a good. It is defined as the difference between the gross income from the sale of n + 1 units of a product and the gross income from the sale of n units of a product at
following formula: MR = TRn+1 - TRn,
where MR is marginal revenue;
TRn+1 - total income from the sale of n+1 units of goods;
TRn is the total income from the sale of n units of goods.
Under perfect competition, a firm sells up to
additional units of production at a constant (constant) price, since any seller cannot influence the established market price by selling an additional quantity of goods. Therefore, marginal revenue is equal to the price of the good, and its curve coincides with the curve of perfectly elastic demand and average income, i.e. MR=AR=P (Fig. 11.5).
In conditions of imperfect competition, marginal REVENUE does not coincide with the price of an additional unit of goods sold (it will be less than the price). This is due to the fact that with an increase in the supply of additional quantity of goods in an imperfect market, the price has to be reduced. At the same time, the price of each previous unit of goods also decreases. This price reduction (loss on n units) is taken into account in the price of n + 1 units of the good. Therefore, the marginal revenue of an additional unit of good is equal to the price of that unit minus the loss on previous units of output caused by the decrease in price.
Graphically, the marginal revenue of an imperfect competitor is a sloping line, reflecting its fall as a result of a price decrease (Fig. 11.6).
The figure shows that the average income line and the line marginal income with the production of additional units of output gradually decrease, since the demand line in this case goes down (it coincides with the average income line), and
The individual income falls below the price as the volume of sales influences the market price.
The income of the firm in practice consists of two parts. Firstly, from the proceeds from the sale of products (goods or services). It is a certain amount Money from the main and non-core activities of the company, the end result of which is manufactured and sold products or services rendered (work performed), paid for by the buyer or customer.
Secondly, from non-operating income, which is a side financial income of the company. They are not directly related to the main production activities. Their sources can be: dividends on invested shares or acquired shares and other securities, fines received from counterparties, penalties, forfeits, interest for keeping funds in a bank and other unplanned income.
By selling its products, the company receives income, or revenue.
Income - this is the amount of money received by the company as a result of the production and sale of goods or services for a certain period of time. The amount of income, its change indicates the degree of efficiency of the company.
Distinguish total, average and marginal income.
Total (gross) income (TR ) is the total amount of cash receipts received by the firm as a result of the sale of its products. It is calculated by the formula: TR = P Q, where R- the selling price of a unit of production; Q- the number of units of manufactured and sold products. As you can see, the amount of total income, other things being equal, depends on the volume of output and sales prices.
Average income (AR) is the amount of cash receipts per unit of product 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 period of time or when a firm's product range consists of several or many goods or services.
Marginal Revenue (MR) is the increment in gross income received as a result of the production and sale of an additional unit of output. It is calculated according to the formula MR = TR / Q, where TR is the increase in gross income as a result of the sale of an additional unit of production; Q is the increase in production and sales per unit.
Comparison of marginal revenue and marginal cost for a commodity producer is important in developing his economic policy.
5. Profit of the company: concept and types
From the amount of income in to a large extent depends on the firm's profit.
Profit is the difference between total revenue and total cost, 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 accounting and economic profits.
Accounting profit - the difference between total revenue and external (accounting) costs. Recall that the latter include explicit, actual costs: wages, 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 from the income of all costs: 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 is of interest to the manufacturer in this particular business area. At the same time, it encourages other firms to enter the field.
The essence of economic profit can be explained by the entrepreneur's innovation, his application of innovative solutions in economic affairs, his willingness to bear full responsibility for the economic decisions made. Therefore, sometimes the profit itself is defined as a payment for risk.
Depending on how revenue and costs are related, the firm'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 the income that reimburses the minimum costs of the entrepreneurial factor after the entrepreneur has reimbursed all production costs. Earlier it was noted that it is this profit that keeps the entrepreneur in this field of activity. However, at this point there is still no economic profit.
A negative profit means that the firm is making a loss. At the expense of proceeds, it only partially covers the costs of production.
Since the monopolist is the only producer of a given commodity, the demand curve for the monopolist's product is at the same time the market demand curve for the commodity. This curve has, as usual, a negative slope (Fig. 11.16). Therefore, the monopolist can control the price of his product, but then he will have to face a change in the magnitude of demand: the higher the price, the lower the demand. Monopoly is a price finder. Its goal is to set a price (respectively, choose such an issue) at which its profit will be maximum.
The general rule is that profit is maximized at the output when marginal revenue equals marginal cost - MR = MS(topic 10, paragraph 10.3) - remains true for a monopoly. The only difference is that for a perfectly competitive firm, the marginal revenue line (MR) is horizontal and coincides with the market price line at which this firm can sell any quantity of its products (topic 10, paragraph 10.2). In other words, the marginal revenue of a competitive firm is equal to price. On the contrary, for the monopoly line MR is not horizontal and does not coincide with the price line (demand curve).
To justify this, remember that marginal revenue is the increment in revenue when output is increased by one unit:
For an example of calculating marginal revenue, take
the simplest demand function for a monopoly product: P= 10 - q. Let's make a table (Table 11.1).
Table 11.1. Marginal revenue of a monopolist
|
TR (P X q) |
|||||||||||
|
MR (ATR/Aq) |
9 7 5 3 1 -1 -3 -5 -7 -9 |
||||||||||
It follows from the data in the table that if the monopolist reduces the price from 10 to 9, demand increases from 0 to 1. Accordingly, revenue increases by 9. This is the marginal revenue received from the release of an additional unit of output. An increase in output by one more unit leads to an increase in revenue by another 7, and so on. In the table, the values of marginal revenue are located not strictly under the values of price and demand, but between them. In this case, the output increments are not infinitesimal, and therefore the marginal revenue is obtained, as it were, "on the transition" from one production quantity to another.
At the moment when marginal revenue reaches zero (the last unit of output does not increase revenue at all), the revenue of the monopoly reaches a maximum. A further increase in production leads to a drop in revenue, i.e. marginal revenue becomes negative.
The data in the table allow us to conclude that the value of marginal revenue related to each output value (except zero) is less than the corresponding price value. The fact is that when an additional unit of output is produced, revenue increases by the price of this unit of output ( R). At the same time to sell this extra unit
output, it is necessary to reduce the price by the value But according to the new
price, not only the last, but also all previous units of the issue are sold (q), previously sold at a higher price. Therefore, the monopolist suffers a loss in revenue from the price reduction,
equal . Subtracting from the gain from output growth the loss from
price reduction, we obtain the value of marginal revenue, which is, therefore, less than the new price:
With infinitesimal changes in price and demand, the formula takes the form: 
where is the derivative of the price function with respect to demand.
Let's return to the table. Let the monopolist set a price of 7 last week by selling 3 units at it. goods. In an attempt to increase revenue, he lowers the price to 6 this week, allowing him to sell 4 units. goods. Hence, from the expansion of output by one unit, the monopolist receives 6 units. additional income. But from the sale of the first 3 units. of goods, he now receives only 18 units. revenue instead of 21 units. last week. The losses of the monopolist from the price reduction are, therefore, 3. Therefore, the marginal income from the expansion of sales with the price reduction is: 6 - 3 = 3 (see Table 11.1).
It can be rigorously proven that with a linear demand function for the monopolist's product, the function of its marginal revenue is also linear, and its slope is twice the slope of the demand curve(Fig. 11.3).
If the demand function is given analytically: R = P(q), then to determine the marginal revenue function, it is easiest to first calculate
Rice. 11.3.
maintain the output revenue function: TR = P(q)xq, and then take its output derivative: 
Let's combine the functions of demand, marginal revenue (MR) marginal (MS) and average costs (AC) monopolist in one figure (Fig. 11.4).
Rice. 11.4.
Point of intersection of curves MR and MS defines release (q m), at which the monopolist earns the maximum profit. Marginal revenue is equal to marginal cost. On the demand curve, we find the monopoly price corresponding to this output (P t). At this price (output) the monopoly is in a state of equilibrium for it is unprofitable for her to raise or lower the price.
In this case, at the equilibrium point, the monopolist receives economic profit (surplus profit). It is equal to the difference between its revenue and total costs:
On fig. 11.4 revenue is the area of the rectangle OP m Eq m , total cost - area of rectangle OCFq m . Therefore, the profit is equal to the area of the rectangle CP m EF.
It is noteworthy that in conditions of monopoly equilibrium, the price is higher than marginal cost. This is different from the equilibrium of a competitive firm: such a firm chooses an output at which price exactly equals marginal cost. The problems arising from this will be discussed below.
In the topic “Perfect competition” (item 4), it was said that in the long run a competitive firm is not able to earn economic profit. This is not the case in a monopoly. As soon as the monopolist manages to protect its market from the invasion of competitors, it maintains economic profit in the long run.
At the same time, the possession of monopoly power does not in itself guarantee economic profit, even in the short run. A monopolist can incur losses if the demand for its products falls or its costs increase - for example, due to an increase in resource prices or taxes (Fig. 11.5).
Rice. 11.5.
In the figure, the monopoly's average total cost curve is above the demand curve for any output, which condemns the monopoly to losses. By choosing an output at which marginal revenue equals marginal cost, the monopolist minimizes its losses in the short run. The total loss in this case is equal to the area CFEPm. In the long run, the monopolist may try to lower its costs by changing the amount of capital employed. In case of failure, he will have to leave the industry.
1. Monopoly
What is a monopoly?
Marginal revenue of a monopolist
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 output under monopolistic competition
3. Oligopoly
What is an oligopoly?
Oligopoly Models
4. Use and allocation of resources by the firm
Marginal yield of a resource
Marginal resource cost
Choosing a Resource Combination Option
conclusions
Terms and concepts
Questions for self-examination
Perfect competition, as already noted, is rather an abstract model, convenient for analyzing the basic principles of the formation of a firm'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 products and its price, but also by their attitude towards the company itself, to the quality of products produced. her products. In this sense, the position of each firm in the market is somewhat unique, or, in other words, there is an element of monopoly in its behavior.
This element leaves an imprint on the company's activities, makes it take a somewhat different approach to the formation of a pricing strategy, determining the volume of output that is most effective in terms of profits and losses.
Monopoly
What is a monopoly?
To determine how monopoly affects the behavior of a firm, let us dwell on the theory of monopoly. What is a monopoly? How are the costs of a monopoly enterprise formed, on the basis of 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 assumes that one firm is the only manufacturer 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 monopoly company.
One should not equate pure monopoly with monopoly (market) power. The latter means the opportunity for the firm to influence the price and increase economic profit by limiting the volume of production and sales. When people 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 full control over the entire output of the product; if he decides to raise the price, he is not afraid to lose part of the market, to give it to competitors who set lower prices. But this does not mean that he will indefinitely raise the price of his products.
Since the monopoly firm, like any other firm, seeks to obtain high profits, it takes into account market demand and its costs when deciding on the selling price. Since the monopolist is the only producer of this product, the demand curve for its product will coincide with the market demand curve.
How much output should the monopolist provide in order to maximize its profit? The decision on the volume of output is based on the same principle as in the case of competition, i.e. on the equality of marginal revenue and marginal cost.
Marginal revenue of a monopolist
As already mentioned (see Chapter 11), for a firm in conditions of perfect competition, the equality of marginal revenue and price is characteristic. For a monopolist, the situation is different. The curve of average income and price coincides with the market demand curve, and the curve of marginal income lies below it.
Why does the marginal revenue curve lie below the market demand curve? Since the monopolist is the only producer of products on the market and a representative of the entire industry, he, by reducing the price of products to increase sales, 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 monopoly firm:D - demand;MR - Marginal Revenue
For example, a monopolist can sell at a price of 800 rubles. only one unit of their product. To sell two units, he must lower the price to 700 rubles. for both the first and second unit of production. To sell three units of production, the price should be equal to 600 rubles. for each of them, four units - 500 rubles. etc. The income of the monopoly firm, respectively, will be upon sale: 1 unit. - 800 rubles; 2 units - 1400 (700 . 2); Z units -1800 (600 . 3); 4 units - 2000 (500 . 4).
Accordingly, the marginal (or additional as a result of an increase in sales by one unit of output) income will be: 1 unit. - 800 rubles; 2 units - 600 (1400 - 800); 3 units - 400(1800 - 1400); 4 units - 200 (2000 - 1800).
On fig. 12.1 curves of demand and marginal income are shown as two non-coinciding lines, and the marginal income in all cases, except for the release of 1 unit, is less than the price. And since the monopolist decides on the volume of production, equalizing marginal revenue and marginal cost, the price and quantity of output will be different than under competitive conditions.
Profit maximization by a monopolist
To show at what price and at what volume of output the marginal revenue of the monopolist will be as close as possible to the marginal cost and the resulting profit will be the largest, let us turn to a numerical example. 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 incomes of firm X in a monopoly
We assumed that 1 thousand units. a monopolist can sell its products at a price of 500 rubles. In the future, with the expansion of sales by 1 thousand units. he is forced to reduce its price by 12 rubles each time, so the marginal revenue is reduced by 4 rubles. with each increase in sales. The firm will maximize profit by producing 14,000 units. products. It is at this level 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, and thereby reduce profits.
In a competitive market, when the firm's price and marginal revenue are the same, 15,000 units would be produced. products, and the price of this product would be lower than in a monopoly:
Graphically, the process of choosing a price and volume of production by a monopoly firm is shown in Fig. 12.2.
Rice. 12.2. Determination of price and volume of production by a monopoly firm:D - demand;MR - marginal revenue; MC - marginal cost
Since in our example production is possible only in whole units of output, and point A on the graph lies between 14 and 15 thousand units, 14 thousand units will be produced. products. The 15th thousand not produced by the monopolist (and it would have been produced under competitive conditions) means a loss for consumers, since some of them refused to buy because of the high price set by the monopoly manufacturer.
Any firm whose demand is not perfectly elastic will face a situation where marginal revenue is less than price. Therefore, the price and volume of production that bring her maximum profit will be respectively higher and lower than under perfect competition. In this sense, in markets of imperfect competition (monopoly, oligopoly, monopolistic competition), each firm has a certain monopoly power, which is most powerful under pure monopoly.
Monopoly and elasticity of demand
As already noted, the marginal revenue in conditions of perfect competition is equal to the price of a unit of goods and the demand for the firm's product is perfectly elastic. When monopoly power exists, marginal revenue is less than price, the demand curve for the firm's output is sloping, allowing 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 cost of the company MS, the company's management can calculate the price of products P using the formula:
The higher the elasticity of demand, the closer the conditions of the monopolist's activity to the conditions of free competition, and vice versa, with inelastic demand, the monopolist creates more opportunities to "inflate" prices and receive monopoly income.
How do taxes affect the behavior of a monopolist?
As the tax increases marginal cost, their MC curve will shift to the left and up to MC1, as shown in Figure 1. 12.3. The firm will now maximize its profit at the intersection point of P1 and Q1.
The monopolist will reduce production and raise the price as a result of imposing a tax. How much it will raise the price can be calculated using formula (12.1). If the elasticity of demand, for example, is -1.5, then
At the same time, after the introduction of the tax, the price will increase by an amount three times the amount of the tax. The effect of the tax on the monopoly price thus depends on the elasticity of demand: the less elastic the demand, the more the monopolist will raise the price after imposing the tax.
Rice. 12.3. The impact of the tax on the price and output of a monopoly firm:D - demand, MR is marginal revenue; MS - marginal costs without tax; MC1 - marginal cost including tax
Evaluation of monopoly power
Elasticity of demand is an important factor limiting the firm's monopoly power in the market. If we are dealing with a pure monopoly (only one seller), the elasticity of demand becomes the only market factor that limits monopoly arbitrariness. That is why the activity of all branches of natural monopoly is regulated by the state. In many countries, natural monopoly enterprises are state-owned.
However, pure monopoly is quite rare, as a rule, either monopoly power is divided among several large firms, or there are many small firms in the market, each of which produces products that differ from others.
Thus, in markets of imperfect competition, each firm has some degree of market power, which allows it to set a price above marginal revenue and earn economic profit.
As you know, 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 additional profit, the less the firm's bargaining power.
Under conditions of pure monopoly, when the demand for the firm's product coincides with the market demand, its elasticity is the determining measure of the firm's market power. In other cases, where market power is shared between two, three, or more firms, it depends on the following factors:
1. Elasticity of market demand. Demand for an individual firm's product cannot be less elastic than market demand. The greater the number of firms present in the market, the more elastic will be the demand for the products of each of them. The presence of competitors does not allow an individual firm to significantly raise the price without fear of losing part of its sales market.
Therefore, the assessment of the elasticity of demand for the firm's products is the information that should be known to the firm's management. Elasticity data should be obtained by analyzing the sales activities of the firm, sales volume at various prices, conducting marketing research, evaluating the activities of competitors, etc.
2. Number of firms in the market. However, the number of firms alone does not give an idea of how monopolized the market is. To assess the competitiveness of the market, the Herfindahl market concentration index is used, which characterizes the degree of market monopolization:
H=p12 + p22 + …….+ p12 +….+ pn2 (12.2)
where H is the concentration index; p1 ,p2,…….,pi …. pn is the percentage share of firms in the market.
Example 12.1. Let us estimate the degree of market monopolization in two cases: when the share of one firm is 80% of the total sales of this product, and the remaining 20% is distributed among the other three firms, and when each of the four firms carries out 25% of sales in 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= 252i4 == 2500.
In the first case, the degree of market monopolization is higher.
3. The behavior of firms in the market. If firms in the market pursue a strategy of fierce competition, lower prices to capture a larger market share and drive out competitors, prices can drop to near competitive levels (equality of price and marginal cost). Monopoly power and, accordingly, the monopoly income of firms will decrease. However, the receipt of high incomes is very attractive for any firm, therefore, instead of aggressive competition, overt or covert collusion, the division of the market, is more preferable.
The structure of the market, the degree of its monopolization should be taken into account by the company when choosing an activity 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 increase in the 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 that lead to a monopoly. Among them, a significant role is played by the establishment of barriers to the entry of new firms into the industry. Such obstacles may be the need to obtain special permission from state bodies 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, in order 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, automobiles, etc. reduce the competitiveness of foreign goods and strengthen the position of domestic producers.
At the same time, making 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 the monopoly firm can expect an unexpected competitor to appear at any moment.
The higher the profit of a monopoly enterprise, the more willing to enter the industry, for example, by expanding the 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. Under such conditions, the monopolist will be forced to reduce the price, give up part of the profit in order to maintain its position in the market.
Legislative barriers to entry into the industry are also not eternal. To support state officials who express their interests, monopolists spend significant funds, which are included in costs, increasing them. Therefore, in the conditions of a developed market economy, the position of monopoly firms is not so "cloudless" as it seems at first glance.
Price discrimination
Price discrimination is one of the ways to expand the sales market in a monopoly. By producing less products and selling them at a higher price than under conditions of pure competition, the monopolist thereby loses a part of potential buyers who would be ready to purchase the product if its price were lower than the monopoly one. however, by lowering the price in order to expand sales, the monopolist is forced to lower the price of all products sold. But in some cases, the firm may set different prices for the same product for different groups of buyers. If some buyers purchase products at a lower price than others, there is a practice 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 this product into markets, the demand for which has different elasticity.
Indeed, if a firm 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 initial level for all other categories of the population will lead to the fact that when buying these goods, pensioners will immediately resell them. In addition, such a pricing policy can cause dissatisfaction among buyers.
The situation is different 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 for which is different.
Suppose that some airline was selling 100 thousand tickets at a price of 500 rubles. for one ticket. This price was set based on the equality of marginal revenue and marginal cost. The monthly gross income of the company was 50 million rubles. However, as a result of the changes that have taken place (fuel prices have risen, wages have been raised for employees), the company's costs have increased, and the ticket price has been doubled. At the same time, the number of tickets sold decreased by half and amounted to 50,000 tickets. 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 canceled flights due to high prices through the provision of discounts.
On fig. 12.4 graphically depicts the situation when the market for the services of an airline is divided into two separate markets. The first one (Fig. 12.4, a) is represented by wealthy people, businessmen, for whom the speed of movement is important, and not the ticket price. Therefore, their demand is relatively inelastic. The second market (Fig. 12.4, b) is those for whom speed is not so important, and at high prices they will prefer to use the railway. In both cases, the marginal cost of the airline is the same, only the elasticity of demand is different.
From fig. 12.4 shows that with a ticket price of 1 thousand rubles. not a single consumer from the second market will use the services of the airline. However, if this group of consumers is given a 50% discount, 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 cost,D andMR is the demand and marginal revenue of the firm in the first market;D1 andMR1 is the demand and marginal revenue of the firm in the second market
On the one hand, price discrimination allows you to increase the income of the monopolist, and on the other hand, more consumers get the opportunity to use this type of service. This pricing policy is beneficial to both parties. However, in some countries, price discrimination is considered as an obstacle to competition and the strengthening of monopoly power and its individual manifestations fall under antitrust laws.
Monopoly and efficiency
Modern economists believe that the spread of monopoly reduces economic efficiency for at least three main reasons.
First, the profit-maximizing output of the monopolist is lower and the price is higher than under perfect competition. This leads to the fact that society's resources are not used in full, and at the same time, part of the products needed by society is not produced. The quantity of products produced does not reach the point corresponding to the minimum average gross cost, as a result of which production is not carried out with the lowest possible costs at a given level of technology. In other words, maximum production efficiency is not achieved.
Secondly, being the only seller in the market, the monopolist does not seek to reduce production costs. He has no incentive to use the most advanced technology. Renovation of production, cost reduction, flexibility are not matters 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 technical progress.
Third, barriers to entry of new firms into monopolized industries, as well as the enormous effort and money that monopolists spend on maintaining and strengthening their own market power, have a deterrent effect on economic efficiency. It is difficult for small firms with new ideas 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 the monopoly (for example, higher product prices), they highlight its advantages in terms of scientific and technological progress. These benefits, according to them, are as follows:
1. Perfect competition requires each manufacturer to use the most efficient technique and technology already in existence. However, the development of new progressive technical solutions is beyond the power of a single competitive firm. Significant funds are needed to finance R&D, which a small firm that does not earn stable economic profits 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 the economic profits that result from the use of scientific and technological achievements in production will last for a long time and investments in R&D will give a long-term return.
3. Obtaining monopoly profits through higher prices is an incentive for innovation. If every cost-reducing innovation was followed by a price cut, there would be no reason to innovate.
4. Monopoly stimulates competition, since monopoly high profits are extremely attractive to other firms and support the desire of the latter to enter the industry.
5. In some cases, a monopoly helps to reduce costs and realize economies of scale (natural monopoly). Competition in such industries would increase average costs and reduce efficiency.
All market economies have antitrust laws that control and limit monopoly power.
2. Monopolistic competition
Two extreme types of markets have been 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
We note the main features that characterize monopolistic competition:
. there are a relatively large number of small firms in the market;
. these firms produce a variety of products, and although the product of each firm is somewhat specific, the consumer can easily find substitute products and switch his demand to them;
. Entry of new firms into the industry is not difficult. To open a new vegetable shop, atelier, repair shop, significant initial capital is not required. The scale effect also does not require the development of large-scale production.
Demand for the products of firms operating under monopolistic competition is not perfectly elastic, but its elasticity is high. For example, the sportswear market can be attributed to monopolistic competition. Adherents of Reebok sneakers are willing to pay more for its products than for sneakers of other companies, but if the price difference is too large, the buyer will always find analogues of lesser-known companies on the market at a lower price. The same applies to products in the cosmetics industry, the production of clothing, medicines, etc.
The competitiveness of such markets is also very high, which is largely due to the ease of entry of new firms into the market. Let's compare, for example, the market for steel pipes and the market for washing powders. The first is an example of an oligopoly, the second is an example of monopolistic competition.
Entering the steel pipe market is difficult due to large economies of scale and large initial investment, while the production of new grades of washing powder 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 firms will offer consumers new brands of washing powders, sometimes not much different from those already produced (in new packaging, in a different color, or intended for washing different types of fabrics).
Price and output under monopolistic competition
How is the price and output of a firm determined under 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 cost.
On fig. 12.6 shows the curves of prices (demand), marginal income, marginal and average variables and gross costs of two firms, one of which maximizes profits (Figure 12.6, a), the other minimizes losses (Figure 12.6, b).
Rice. 12.6. The price and output of a firm under monopolistic competition, maximizing profits (a) and minimizing losses (b):D - demand:MR— marginal revenue; MC - marginal cost:AVC - average variable costs; ATS - average gross costs
The situation is in many ways similar to perfect competition. The difference is that the demand for firms' products is not perfectly elastic, and therefore the marginal revenue curve runs below the demand curve. The firm will make the greatest profit at the price P0 and the output Q0, and the minimum losses - at the price P1 and the output Q1.
However, in markets of monopolistic competition, economic gains and losses cannot last long. In the long run, losing firms will choose to leave the industry, and high economic profits will encourage new firms to enter. New firms producing similar products 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 decrease 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 situation of long-term equilibrium is shown in fig. 12.7.
Rice. 12.7. The long-run equilibrium of a firm under monopolistic competition is:D - demand;MR— marginal revenue; MS - marginal costs; ATS - average gross costs
The lack of economic profit deprives new firms of the incentive to enter the industry, and old firms to leave it. However, in conditions of monopolistic competition, the desire to break even is more of a trend. In real life, firms can earn economic profits over a fairly long period. This is due to product differentiation. Some types of products manufactured 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 hairdressing salon or engage in private medical practice, you must have the appropriate education, confirmed by a diploma.
Is the market mechanism of monopolistic competition efficient? From the point of view of resource use, no, since production is not carried out at minimum cost (see Figure 12.7): production Q0 does not reach a value where the average gross cost of the firm is minimal, i.e. constitute the quantity Q1. However, if we evaluate the effectiveness in terms of satisfying the interests of consumers, then the variety of goods that reflects the individual needs of people is more preferable for them than the same products at lower prices and in larger volumes.
3. Oligopoly
What is an oligopoly?
oligopoly name the type of market in which a few firms control the bulk of it. At the same time, the range of products can be both small (oil) and quite extensive (cars, chemical products). An oligopoly is characterized by restrictions on the entry of new firms into the industry; they are associated with economies of scale, high advertising costs, existing patents and licenses. High barriers to entry are also a consequence of the actions taken by the leading firms in the industry in order to keep new competitors out of the industry.
A feature of an oligopoly is the interdependence of firms' decisions on prices and output. No such decision can be made by a firm without taking into account and evaluating 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, the oligopoly model should reflect all three of these 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. For the first time, an attempt to explain the behavior of an oligopoly was made by the Frenchman A. Cournot in 1838. His model was based on the following premises:
. there are only two firms in the market;
. each firm, making its decision, considers the price and volume of production of a competitor to be constant.
Suppose that there are two firms 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 much output firm Y will produce. However, firm X does not know what firm Y will do, it can only assume possible options for its actions and plan its own output accordingly.
Since market demand is a given value, the expansion of production by the firm will cause a decrease 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 starts to expand sales. The price and output set by firm X on the basis of the equality of marginal revenue and marginal cost will decrease, respectively, from P0 to P1, P2 and from Q0 to Q1, Q2.
Rice. 12.8. Cournot model. Change in the price and output of firm X with the expansion of production by firm Y:D - demand;MR - marginal revenue; MC - marginal cost
If we consider the situation from the perspective of firm Y, then we can draw a similar graph that reflects the change in the price and quantity of its output depending on the actions taken by firm X.
By combining both graphs, we get the response curves of both firms to each other's behavior. On fig. 12.9 curve X reflects the reaction of the firm of the same name to changes in the production of the firm Y, and the curve Y, respectively, vice versa. Equilibrium occurs at the point where the response curves of both firms intersect. At this point, firms' assumptions match their actual actions.
Rice. 12.9. Response curves of firms X and Y to each other's behavior
One essential circumstance is not reflected in the Cournot model. Competitors are expected to react to a firm's price change in a certain way. When firm Y enters the market and robs firm Y of consumer demand, firm Y "gives up" and enters into a price game, lowering prices and output. However, firm X can take a proactive stance and, by significantly reducing the price, keep firm Y out of the market. Such firm actions are not covered by the Cournot model.
A "price war" reduces the profits of both sides. Since the decisions of one of them affect the decisions of the other, there are reasons to agree on price fixing, the division of the market in order to limit competition and ensure high profits. Since all kinds of collusion are subject to antitrust laws and 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 decrease, or some other event occurs that allows the price to be lowered without hurting profits, the firm will not do so for fear that competitors will perceive such a move as the start of a price war. Raising prices is also unattractive, as competitors may not follow suit.
The firm's response to price changes by competitors is reflected in curved curve models demand for the firm's products in an oligopoly. This model was proposed in 1939 by the Americans
R. Hall, K. Hitch and P. Sweezy. On fig. 12.10 curves of demand and a limiting income of firm X (are selected by a thick line) are represented. If a firm raises its price above P0, then its competitors will not raise prices in response. As a result, firm X will lose its customers. Demand for its products at prices above P0 is very elastic. If firm X sets the price below P0, then competitors are likely to follow in order to maintain their market share. Therefore, at prices below P0, demand will be less elastic.
Rice. 12.10. Curved Demand Curve Model:D1,MR1 - curves of demand and marginal income of the firm at prices above Р0;D2 MR2 - curves of demand and marginal income of the firm at prices below P0
The sharp difference in the elasticity of demand at prices above and below P0 causes the marginal revenue curve to break, which means that a price decrease cannot be compensated by an increase in sales. The curved demand curve model provides an answer to the question why firms in an oligopoly strive to maintain stable prices by moving competition to the non-price area.
There are other models of oligopoly based on game theory. Thus, when determining its own strategy, the firm evaluates the probable profits and losses, which will depend on which strategy the competitor chooses. Let us assume that firms A and B control the majority of sales in the market. Each of them seeks to increase sales and thereby ensure profit growth. The result can be achieved by lowering prices and attracting additional buyers, intensifying advertising activities, etc.
However, the result for each firm depends on the reaction of the competitor. If firm A starts to cut prices and firm B follows, none of them will increase their market share and their profits will decrease. However, if firm A lowers prices and firm B does not do the same, then firm A's profits will increase. Developing its strategy in the field of prices, firm A calculates the possible responses from firm B (Table 12.2).
Table 12.2. The influence of market strategy on the change in the profit of firm A
(numerator) and company B (denominator), million rubles.
If firm A decides to lower prices and firm B follows it, firm A's profit will be reduced by 1,000 thousand rubles. If firm A lowers prices, and firm B does not do the same, then the profit of firm A will increase by 1,500 thousand rubles. If firm A does not take any steps in the field of prices, and firm B lowers its prices, firm A's profit will be reduced by 1,500 thousand rubles. If both firms leave prices unchanged, their profits will not change.
What strategy will Firm A choose? The best option for her is to reduce prices with the stability of firm B, in this case, profit increases by 1500 thousand rubles. However, this option is the worst from the point of view of firm B. For both firms, it would be expedient to leave prices unchanged, while profits would remain at the same level. At the same time, fearing the worst possible scenario, firms will lower their prices, losing 1,000 thousand rubles each. arrived. Firm A's price reduction strategy is called least loss strategy.
The desire for the least loss can explain why firms in an oligopoly prefer to spend heavily on advertising, increasing their costs and not achieving an increase in market share.
None of the above models of oligopoly can answer all questions related to the behavior of firms in such markets. However, they can be used to analyze certain aspects of the activities of firms in these conditions.
4. Use and allocation 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 the volume of sales and the price of products. The same method is used in determining the amount of resources needed for the production of products, providing the company with the minimum total costs and, accordingly, the maximum profit. This is what will be discussed below.
What determines the demand for resources from an individual firm? First of all, it depends on the demand for finished products produced using these resources, so 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, the demand for energy resources is growing very slowly. .Another circumstance affecting the demand for resources is their prices. The company's funds directed to the purchase of resources are included in its production costs, so the company seeks to use resources in such a quantity and combination that will allow it to maximize profits.
The amount of resources used by the firm depends on their return, or productivity. The latter is subject to the law of diminishing returns. Therefore, the firm will expand the use of resources as long as each additional resource will increase 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 hence the income of the firm.
Marginal yield of a resource
Assume that the firm uses only one variable resource. It may turn out to be labor, a separate type of equipment, etc. The increase in output in physical terms, provided by increasing this resource by one unit, is called marginal product. The increase in the firm's income due to an additional unit of this resource is called resource marginal return or 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 marginal product occurs over a very short period, we can ignore it and assume that it will decrease from the very beginning.
Consider the marginal return on the resource of firm X (Table 12.3). If the 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 the price with the expansion of sales. 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 the resource of firm X in conditions of perfect and imperfect competition in the product market
From the data in Table. 12.3 it can be seen that the rate of decline in the yield 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 firm, since the marginal return is one of the factors that determines the amount of a given resource that the firm will use.
But in order to make a decision about expanding the use of a given resource in production, a firm must not only know how an additional resource will affect an increase in its income. She always compares income with costs and evaluates 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 yield of a resource for a firm in conditions of perfect and imperfect competition in the market of finished products: MRP1, MRР2 - marginal returns, respectively, under the specified conditions;Qres - the amount of resource used;Qres - resource price
Marginal resource cost
The increase in costs due to the introduction into production of an additional unit of a variable resource is called the marginal cost of the resource. When a firm faces perfectly competitive conditions in a resource market, its marginal cost per resource will be equal to the price of that resource.
For example, if a small firm wants to hire an accountant, they 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 marginal cost of labor for the firm will look like a horizontal line (for example, see Figure 12.12).
How much resource should be used?
The principle of choosing the amount of resource used by the firm is similar to the principle of determining the optimal volume of output. It will be profitable for the firm to increase the amount of resource used up to the point where its marginal return equals the marginal cost of that resource (Figure 12.12). In this example, with a resource price of 1000 rubles. a perfectly competitive firm in the market of finished products will use 6 units. of this resource (the schedule of marginal profitability MRP1), and in conditions of imperfect competition - only 5 units. (graph of the marginal return of the MRP2 resource).
Rice. 12.12. The optimal amount of resource used for a competitive firm and for a firm that is an imperfect competitor in the market of finished products:MPR1 andMPR2 - marginal resource returns for the firm under conditions of perfect and imperfect competition in the finished product market, respectively; MCres - marginal cost per resource
We have determined how much of the variable resource the firm will use, given that all other resources are constant. However, in practice, the firm is faced with the question of how to combine the resources used in order to maximize profits. In other words, she is faced with a situation where several resources are variables and it is necessary to determine in which combination to use them.
Choosing a Resource Combination Option
The producer's choice of the combination of resources that provides the minimum cost is reminiscent of the consumer's choice (see Chapter 9). From various sets of goods offered that bring him the same 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 goods, taking into account the prices of the resources. Assume that two interchangeable resources are used. For example, the company took over the cleaning of city streets from snow. For this purpose, she needs wipers and snowplows. How many machines and how many wipers does she need to do 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 janitors (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, while cars, on the contrary, 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. A schedule of possible options for combining two types of resources required to perform a given amount of work: K - the number of snowplows;L - number of janitors
In order to make a decision on how many machines and janitors are needed for cleaning 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 of the company, which it will incur as a result of the use of different amounts of manual labor and machines, and determine the minimum. Costs depend on the price of snowplows and the wages of janitors.
Suppose that the use of one car will cost the company 20 thousand rubles, and hiring 10 janitors - 10 thousand rubles. The total cost of the company associated with the purchase of cars and hiring janitors can be calculated by the formula:
C=KRK+LPL (12.3)
Where C is the total costs of the company, thousand rubles; K is the number of cars, pcs.; RK - the 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 is the number of snowplows;L - number of janitors
On fig. 12.14 three schedules corresponding to three variants of the general costs of firm are represented. For example, graph C1 shows all possible combinations of machines and manual labor that 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 shown in Fig. 12.13 and 12.14 (Fig. 12.15).
The 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 the costs will be equal to 80 thousand rubles. In other words, the minimum cost will be achieved if the firm uses two snowplows and hires 40 janitors.
Rice. 12.15. Graph of the combination of two resources that minimizes the costs of the firm
How can the firm find this point without resorting to charting? 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.
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 the prices of these factors. From this we can conclude that the firm will minimize costs when the ratios of the marginal profitability of each resource to its price are 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, the 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, whether it uses a new set of wipers or a new snow blower.
If the price of one of the factors changes, then the firm will minimize costs with a different combination of them.
conclusions
1. Pure monopoly assumes that one firm is the only manufacturer of this product, which 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 barriers to entry of new firms into the industry, patents and licenses; c) dishonest behavior, etc.
3. The demand curve for the products of the monopoly firm is sloping and coincides with the market demand curve. Costs and market demand are constraints that prevent a monopolist from arbitrarily setting a high price for its product. 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, he will sell at a higher price and produce less 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 affected by the number of firms in the market, concentration, and competitive strategy.
5. Monopoly reduces economic efficiency. The antimonopoly laws of different countries prevent the emergence and strengthening of monopoly power. The subject of state regulation are natural monopolies. In natural monopoly sectors, many enterprises are state-owned.
6. In real life, pure monopoly, like perfect competition, is quite rare. Real markets are very diverse and are characterized by conditions of monopolistic competition, gradually turning into an 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 earn normal profits in the long run, when economic profit tends 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 the oligopoly is the mutual dependence of the decisions of individual firms in the field of output volume and price. Entry of new firms into the industry is significantly hampered, and economies of scale make the existence of a large number of producers inefficient. There are various 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 the behavior of firms.
9. On the part of an individual firm, the demand for resources is determined by their marginal profitability. The marginal profitability of any variable resource slowly decreases in accordance with the law of diminishing returns. The firm will expand the use of the resource as long as its marginal return is higher than the marginal cost of it, i.e. until the two are equal.
In conditions where the firm's demand for a resource is a small fraction of the market demand for it, the marginal cost of the resource for this firm is equal to its price.
10. The firm seeks to choose a combination of resources used, which provides the minimum cost. This is possible if the marginal return of each resource is proportional to its price.
Terms and concepts
Monopoly (market) power
Price discrimination
Marginal yield of a resource
Marginal resource cost
Questions for self-examination
1. What are the reasons for the emergence of a monopoly?
2. What determines the price and volume of production in a monopoly?
3. What factors influence monopoly power? How does the concentration of production affect monopoly power? In which of the two options is the monopoly power higher: a) there are five firms on the market, each of which has an equal share in total sales; b) sales shares are distributed as follows: firm 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 monopoly profits?
5. What is common and what are the differences between perfect and monopolistic competition? What are the advantages and disadvantages of monopolistic competition?
6. Why can we talk about the tendency to receive normal profits in the long run for firms operating in conditions of monopolistic competition?
7. What are the main features of an oligopoly?
8. Why is there no single theory that fully reflects the behavior of firms in the market? Why prefer non-price competition to price competition? What is the Cournot equilibrium?
9. What type of market can be attributed to: the automotive industry, ferrous metallurgy, light industry, the 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 engineering is monopolized. Is it so?
11. What determines the amount of resource used by the firm?
12. What is the marginal profitability of a resource? What is the difference between the marginal returns of a resource for a competitive firm and a monopoly firm in the finished product market?
13. Let's assume that the firm is a monopolist in the market of finished goods. How many workers will she hire at a wage rate of 1200 rubles?
How many workers would she employ in a perfectly competitive product market? The information required to answer the question is given below:
What happens if the wage rate doubles?