What is the volume of production of goods and services. Production results of the enterprise

Under production volume(OP) is understood as the final outcome of an enterprise’s activity in the manufacture of a product and the provision of a production service.

Estimation of production volume

OP is assessed using the following:

• Natural indicator. It describes the nature of the product using its nomenclature, range, and quality.
• Cost indicator. It is used to assess the gross, marketable and sold product.

The main one is the sold product. It represents the price of only that portion of the manufactured product that has already been paid by the buyer. This indicator was given the name “sold shaft”.

Volume of commercial productconsists of a product already sold and the cost of that part of it that is in storage or has already been sent to the customer, but has not been paid by him.

Volume gross product is the totality of the product produced for a specific period. It combines the position of a marketable product, the cost of increasing or decreasing the number of remaining semi-finished products in production.

OP is determined using:

labor indicators – wage fund, bonuses for workers;
indicators of the net product, represented by the difference between the gross product and material goods used in production (raw materials, materials, fuel, energy).

These points are not subject to the distorting influence that material intensity of production has in various industries.

With the use of such indicator systems, the calculation of the definition of OP will be more authentic and realistic.

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Company performance results

So, the result of a firm’s activities depends on the price of products and the volume of production, which determines the income and production costs of both competitive and non-competitive firms.

To find the optimal volume of production, the method of comparing the income generated by an additional unit of production with the increase in production costs caused by its release is often used, i.e. To determine the optimal production volume, a company should compare marginal revenue (M.R.)at marginal cost(MS). A company that produces in volumes at which MR = MS, receives the maximum possible profit at given prices. At the same time, we must remember that the company is interested in profit on the entire mass of output (and not just on the marginal unit). Thus, optimal production volume is the volume at which the marginal cost of production ( MS) and marginal revenue ( M.R.) are equal.

As long as marginal revenue exceeds marginal cost, the firm should expand production, since by increasing output by one unit, the firm will increase its profit. But once marginal cost exceeds marginal revenue, the firm must reduce production or its profits will decline.

Equality M.R. and MC is a condition for maximizing profits for any firm, regardless of market structure in which it operates (perfect or imperfect competition).

This is equality under perfect competition when M.R. = R, transforms into equality:

MS = M.R. = R.

A perfectly competitive firm achieves its profit-maximizing optimal output, given that price equals marginal cost(Fig. 7.9).

Quantity of products, units

Rice. 7.9. Profit maximization rule

The firm earns maximum profit when (MR = MS); at Q 1

the total amount of profit will be less than at Q e ; at Q 2 the company will bear

losses, since its costs will be greater than its income

Any deviations from Q e lead to losses for the company either in the form of direct losses with a larger volume of production, or in the form of a reduction in the amount of profit with a decrease in output.

The equality of marginal cost and marginal revenue is a kind of signal that informs the manufacturer whether the production optimum has been reached or whether further profit growth can be expected.

conclusions

1. The relationship between the volume of output and the amount of resources expended is described by the production (technological) function. An isoquant is a curve showing all possible combinations of resources that can be used to produce a given volume of output. In order to economically choose from a variety of possible production options effective option, a cost assessment of resource costs is necessary.

2. The volume of production in value terms is measured by three indicators: total product(the entire volume of output), average product (output per unit of variable resource); marginal product (production increase due to an increase in investments of one type of resource per unit). Due to the law of diminishing returns, as the investment of one type of resource increases and other resources remain constant, the marginal product tends to decrease.

3. The cost of resources spent on production is called production costs. All costs in conditions of limited resources are alternative in nature. The economic costs of production include external costs - cash payments suppliers of resources and internal - income that could have been received by using their own resources differently (lost income). In the short term, when all factors of production remain unchanged and only one changes, a distinction is made between total, fixed and variable production costs for the entire volume of output and per unit of output. Marginal cost is the increase in cost associated with an increase in output per unit.

4. The company's income depends on price and production volume. A perfectly competitive firm is a price taker (it cannot influence the market price) and therefore its income depends only on the volume of output. The income of a firm operating in an imperfectly competitive market and acting as a price setter depends on price and output volume. There are total income, average income and marginal income. For a perfectly competitive firm, average revenue, marginal revenue, and price of output are equal. For a monopolist firm, marginal revenue is less than price.

5. The goal of the company is to maximize profit, which is the difference between total income and total costs. Since both costs and income are a function of production volume, the main problem for the company becomes determining the optimal (best) production volume. A firm will maximize profit at the level of output at which the difference between total revenue and total cost is greatest, or at the level at which marginal revenue equals marginal cost. If the firm's losses are less than its fixed costs, then the firm should continue to operate (in the short term); if the losses are greater than its fixed costs, then the firm should stop production.

One of the most important factors management of production and sales processes is the division of costs into variable and fixed. This division makes it possible to predict profits based on how costs change depending on the growth or decline in sales volume, and to determine for each specific situation the volume of sales that ensures the break-even operation of the enterprise. This, in turn, allows you to avoid erroneous decisions made in the case of calculating the cost in the amount of full expenses.

The key indicator in the sales profit management system is marginal income, which is the difference between sales revenue and variable expenses. Economic significance marginal income is that it provides coverage for fixed costs. Any excess of marginal income over fixed costs forms company profit.

Marginal income characterizes the contribution of each product sold to the profit of the enterprise. Thanks to this indicator, the company's management receives information on the profitability of each type of product in the overall financial result.

Sales growth entails an increase in working capital and requires an increase in sources of financing. Therefore, any forecast of increased sales requires predictive analysis cash flows enterprise, during which it is possible to assess the risk of a shortage Money(negative net cash from current activities).

Costs, production and sales volumes, and profits are closely interrelated, and many questions related to these indicators arise. We will consider the solution to many of them in this article.

INFLUENCE OF SALES STRUCTURE

All company expenses can be divided into two parts:

• variable expenses - change in proportion to the scale of the company’s activities;
• Fixed expenses - remain unchanged when the scale of the enterprise’s activities changes.

To variable expenses include direct material costs and wage production personnel with deductions (piecework payment). To fixed expenses usually include administrative and management costs, depreciation charges, as well as selling and general business expenses.

The meaning of dividing costs into variable and constant is that they behave differently in the process of managing production at an enterprise.

It is believed that variable costs per unit of production are a constant value, often called unit variable costs or variable cost rate. Variable costs grow almost in proportion to the growth in production volume.

Fixed costs per unit of production decrease with increasing quantity of products produced. Thus, total unit costs decrease as production and sales volumes increase.

This economic representation of these costs simplifies the analysis of the influence of individual factors of production at the stage of preliminary aggregated calculations. First of all, this concerns the influence of the structure of production and sales on the company's profit. After all, most enterprises produce a wide range of products.

IN in this case The question arises: how rational is the current structure of sales of individual products? It is possible that the production and sale of products of the same types, but in different volumes and ratios, are more profitable for the company. Selecting a criterion for assessing the optimal sales structure acquires paramount importance in these conditions.

EXAMPLE 1

The company's manufacturing business segment produces three types of products - A, B and C (Table 1). Currently, the segment's activities are unprofitable. The amount of loss is 4 million rubles.

Current sales structure determined by the following data:

• product A - 10.87%;
• product B - 34.78%;
• product C - 54.35%.

If there is demand for products, the solution to improving the sales structure depends on profitability individual species products (goods). By increasing the share of the most profitable products in total sales, it is possible to increase the overall profitability of sales and increase the company’s marginal income.

Table 1. Manufacturing business segment of the company
No.	Index	Product type			Total
	Sales volume, thousand units
	Fixed expenses, thousand rubles.

Before we begin the calculations, we will analyze the profitability of all types of products presented in table. 1.

Product C has a maximum marginal income per unit of production - 500 rubles/unit. It is followed by product B - 300 rub./unit, and closes the row with product A - 80 rub./unit.

It is a mistake to believe that product C is the most profitable in the sales structure, since the relative measure of profitability should not be the marginal income per unit, but ratio of contribution margin to price.

Then it turns out that the share of marginal income in the price of product C is minimal (20%), and the most profitable from this point of view is product A (40%). Accordingly, product B occupies an intermediate place (37.5%).

Therefore, the level of marginal income for the company as a whole is higher, the larger the share in the cost structure occupied by types of products with the maximum ratio of marginal income to price (or the maximum value MD/C ratio). It follows that an increase in the share of high-margin products (MD/C ratio) will lead to an increase in sales profits.

EXAMPLE 2

Suppose the management of an enterprise (example 1) raises the question of increasing the output of products A and B by reducing product C. The new and old sales structure is presented in table. 2.

Let's evaluate how the change in structure will affect the financial result of the company's activities.

Table 2. Old and new sales structure of the company
Product type	Marginal income per unit of production, rub.	MD/C ratio	Sales structure, %
			former	new

First, let's solve the problem in general view. To do this, let's calculate weighted average MD/C ratios for both sales structures by multiplying this coefficient by the sales structure (in percentage).

Previous structure:

• product A:

0.4 × 0.1087 = 0.04348;

• product B:

0.375 × 0.3478 = 0.13042;

• product C:

0.2 × 0.5435 = 0.1087.

Total coefficient MD/C — 0,2826 .

New structure:

• product A:

0.4 × 0.30 = 0.12;

• product B:

0.375 × 0.45 = 0.16875;

• product C:

0.2 × 0.25 = 0.05.

Total coefficient MD/C — 0,33875 .

As we see, the new sales structure led to an increase in the weighted average ratio(MD/C). This also means increased profits, since fixed costs have not changed.

Let's calculate the amount of marginal income relative to revenue, taking into account the weighted average MD/C ratio. For the old sales structure it would be:

92,000 thousand rubles. × 0.2826 = 26,000 thousand. rub.

The amount of loss for the old structure will be:

26,000 thousand rubles. - 30,000 thousand rubles. = -4000 thousand rub.

This completely coincides with the financial result from example 1 (see Table 1).

The amount of marginal income for new structure sales:

92,000 thousand rubles. × 0.33875 = 31,165 thousand. rub.

With constant fixed costs, the profit for the new structure will be:

RUB 31,165 thousand - 30,000 thousand rubles. = 1165 thousand. rub.

That this is so can be shown by fully calculating the company’s economic indicators (Table 3).

Table 3. Manufacturing business segment of the company for the new sales structure
No.	Index	Product type			Total
	Price per unit of production, rub.
	Variable costs per unit, rub.
	Marginal income per unit, rub. (item 1 - item 2)
	Marginal income to product price, % (item 3 / item 1)
	Sales volume, thousand units
	Revenue, thousand rubles (item 1 × item 5)
	Revenue for each type of product to total revenue, %
	Variable expenses, thousand rubles. (item 2 × item 5)
	Fixed expenses, thousand rubles.
	Financial result, thousand rubles. (clause 6 - clause 8 - clause 9)

In Table 3, sales volume in physical units is calculated by dividing revenue for each sales position (type of product) by the corresponding unit price. Sales volume will be:

• for the product A:

RUB 27,600 / 200 rub./pcs. = 138 thousand units;

• for the product B:

RUB 41,400 / 800 rub./pcs. = 51.75 thousand units;

• for the product C:

23,000 rub. / 2500 rub./pcs. = 9.2 thousand pcs.

As we can see, the financial results overall assessment and more complete calculations made in table. 3, completely coincided.

IT IS IMPORTANT

To ensure that the required (planned) amount of profit is obtained, it is necessary to maintain a certain ratio of marginal income (contribution) to revenue.

Conclusion: if production conditions and demand allow, then the previous sales structure should be replaced with a new one, in which the share of high-margin products is much higher. In this case, factors such as market share and the ability to offer customers the range of goods they need must be taken into account.

INFLUENCE OF PRODUCTION FACTOR

In real conditions, the considered possibilities for expanding production volume may be limited by the level of the company’s existing production capacity and other production factors (lack of workers with the necessary qualifications, required materials, etc.).

If the demand for products exceeds the production capabilities of the enterprise, it is necessary to determine factors limiting its production. You can then analyze the relationships in the volume-cost-production chain and find an appropriate solution to overcome this limitation.

EXAMPLE 3

Let us introduce for the company under consideration, which produces three types of products, restrictive condition - throughput equipment. Table 4 presents all additional data subject to this limitation ( unit processing time).

Table 4. Manufacturing business segment of the company with resource limitations
No.	Index	Product type
	Price per unit of production, rub.
	Variable costs per unit, rub.
	Marginal income per unit, rub. (item 1 - item 2)
	Estimated demand, thousand pcs.
	Marginal income per unit of limiting factor, rub. (clause 3 / clause 5)

Suppose the technical capabilities of the equipment are limited 420 thousand machine-hours (we're talking about about product output per month). To ensure the production of all products in quantities corresponding to demand, more time will be required:

30 + 220 + 240 = 490 (thousand machine-hours).

Under these conditions, one can reason as follows. Product C brings the highest marginal income per unit, so it should be produced in the largest possible quantity, that is, corresponding to demand. Then you need to maximize the output of product B (the second most profitable type of product) and, if allowed production capacity, produce products A.

This production plan for all three types of products is presented in Table. 5.

Table 5. Initial production plan with resource constraints
No.	Index	Product type			Total
	Price per unit of production, rub.
	Variable costs per unit, rub.
	Marginal income per unit, rub. (item 1 - item 2)
	Sales volume, thousand units
	Processing time per unit of production, machine-hour
	Time required for production, thousand machine-hours (item 4 × item 5)
	Fixed expenses, thousand rubles.

According to the calculation, it is possible to ensure full demand only for products C in the quantity 30 thousand. things. Moreover, its production required 240 thousand machine-hours of equipment operation. Consequently, 180 thousand machine-hours (420 - 240) remain for the production of products A and B.

This machine time can be used to produce 45 thousand units of product B (180 thousand machine-hours / 4 machine-hours/unit). There is no capacity to produce product A. Then the financial result from the sale of products of this structure will be negative (the loss will be RUB 1.5 million.).

Let us immediately note the depravity of such a practice. This option did not take into account the labor intensity of the production of certain types of products in the sense of estimating income per unit of the limiting factor.

As can be seen from table. 4, we have the highest marginal income (per unit of processing time) for product A (160 rubles), smallest value— for product C (62.5 rub.). This means that the order of choice for the quantity of products produced should be taken as follows: A → B → C.

Accordingly, it should be released maximum amount products A (60 thousand. products). The time required for its production will be 30 thousand machine-hours.

Maximum output B (55 thousand. things) will require 220 thousand machine hours.

Remaining time for production C will be 170 thousand machine-hours (420 - 30 - 220), which will allow the production 21.25 thousand. units of this product (170 thousand machine-hours / 8 machine-hours/unit).

Calculated data for the new product release plan are presented in table. 6.

Table 6. Final production plan with resource constraints
No.	Index	Product type			Total
	Price per unit of production, rub.
	Variable costs per unit, rub.
	Marginal income per unit, rub. (item 1 - item 2)
	Sales volume, thousand units
	Processing time per unit of production, machine-hour
	Time required for production, thousand machine-hours (item 4 × item 5)
	Marginal income for the entire issue, thousand rubles. (item 3 × item 4)
	Fixed expenses, thousand rubles.
	Financial result, thousand rubles. (clause 7 - clause 8)

As we can see, the change in the sales structure allowed the company to get rid of losses. The financial result was positive - 1925 thousand. rub. arrived.

IT IS IMPORTANT

The priority of production of a particular type of product must be assessed based on the marginal income per unit of the limiting factor. IN this production this factor is the processing time per unit different types products in machine hours.

Conclusion: To improve the sales structure and increase the profit of a company with limited resources, it is necessary to estimate the marginal income per unit of the limiting factor, and then establish the sequence (priority) of choosing the number of products produced by the company.

INFLUENCE OF OPERATIONAL LEVERAGE

In the process of justifying decisions made about this or that innovation in the production process, it is necessary to observe principle of relevance. The essence of the principle is that for the purposes of making any decision, only those incomes and expenses that are directly related to solving a given problem are taken into account. Previous earnings and costs in this regard are irrelevant and are not taken into account.

Let's consider this principle using the example of making a decision on an additional order in a situation with incomplete utilization of production capacity.

EXAMPLE 4

According to data on core activities, the company's sales volume is 60 thousand units of products per month (sales price - 100 rubles per unit).

An additional order was received for the production of the same products in the amount of 12 thousand pieces of products. Selling price offered is less - total 85 RUR. for a unit ( option 1).

To fulfill an order received, additional one-time costs will be required in the amount of 300 thousand. rub. This is due to the acquisition of the necessary special equipment to meet customer requirements. In addition to this, on 10 % labor costs (including deductions) will increase, since employees will have to be paid extra for overtime work.

The question of the advisability of accepting an additional order can be resolved positively if the income from its implementation covers the costs associated with it.

The management report on profits and losses for the main and additional orders (option 1) is shown in table. 7.

Table 7. Assessment of the feasibility of accepting an additional order
No.	Index	Main order	Additional order
			option 1	option 2
	Sales volume, pcs.
	Sales price, rub./pcs.
	Revenue, rub. (item 1 × item 2)
	Material costs, rub./piece
	Labor costs, rub./pcs.
	General production costs, rub./pcs.
	Total variable costs, rub./piece. (clause 4 + clause 5 + clause 6)
	Variable costs for the entire issue, rub. (item 1 × item 7)
	Fixed expenses, rub.
	Financial result, rub. (clause 3 - clause 8 - clause 9)

Let's evaluate the economic feasibility of accepting an additional order.

Production capacity is not fully loaded, so we can assume that accepting an additional order will not increase fixed costs (with the exception of one-time costs associated with the order - 300 thousand rubles). Therefore, a reasonable assessment of such a situation requires that only the income and expenses associated with the additional order be included in the calculation.

As can be seen from the calculations, due to the lower selling price and additional one-time costs, accepting such an order gives a negative financial result. Loss - 18 thousand. rub. Naturally, this option, in principle, cannot suit a production company.

The situation can be changed if you apply operating leverage effect. It is based on the mechanism varying degrees the impact of sales volume on revenue and variable expenses of the enterprise.

Given the linear nature of the dependence of these indicators on the volume of revenue, everything is determined by the relation sales prices (Ts pr) And unit cost variable expenses(From the lane). Therefore, revenue is growing at a faster rate than variable expenses. There inevitably comes a point when marginal income begins to exceed fixed costs.

To determine critical break-even point for a business, you can use a formula that equates marginal profit and fixed costs of the enterprise. This critical point can be found as follows:

Q cr = F/ (C pr - S lane),

Where Q kr - critical sales volume in physical units;

F- fixed costs.

After substituting the relevant data we get:

Q kr = 300,000 / (85 - 61.5) = 12,766 pcs..

Once this sales volume has been achieved, sales will begin to appear. positive influence operating leverage effect.

To more clearly visualize the impact of operating leverage on profit growth, We will double our sales volume, up to 24 thousand. products (option 2). At the same time, we assume that labor costs (including deductions) will increase by 20 % compared to the data for the main order (see Table 7).

According to calculations, accepting such an order provides additional profit in the amount of 228 thousand. rub. (despite the fact that the price offered by the buyer was lower than the price at which the company sold its products under the main order). The source of its formation is savings on the general fixed costs of the company.

As we see, with an increase in sales volume, the cost of sales volume (revenue) increases at a faster pace than the growth of variable costs in accordance with their price ratio. So, for option 2 this ratio will be:

C pr / S lane = 85 rub. / 63 rub. = 1,349 .

As sales volume increases, the rate of growth of marginal income continues to change in the same proportion. That is, with an increase in sales volume in option 2, for example, by 10%, there is an increase in marginal income by also 10%.

This can be easily checked by multiplying the sales volume increased by 10% in natural units (pieces) by the difference between the price and the unit cost of variable costs. Then the new value of marginal income will be:

MD = (85 - 63) × 24,000 × 1.1 = 580,800 (rub.).

From here relative increase in marginal income in percentages:

∆MD = (580,800 - 528,000) / 528,000 × 100% = 52,800 / 528,000 × 100% = 10 % .

This is what needed to be proven due to the linear dependence of marginal income on sales volume.

Conclusion: the company's acceptance of an additional order depends on the influence of the operating leverage effect, that is, on the ratio of variable and fixed costs associated with the implementation of the order. If the marginal income covers the fixed costs associated with the order, then the additional order can be accepted by the company for execution.

PLANNING SALES VOLUME TO COVER MONETARY COSTS

The above does not exhaust the analytical capabilities of the economic grouping of expenses into constant and variable characteristics. In particular, when predicting the possibility of covering all current expenses of an enterprise in cash, you can use the formula discussed above for determining the critical sales volume.

In this case, in the formula It is necessary to exclude from the composition of fixed costs expenses that are not accompanied by an outflow of cash, primarily depreciation charges. The formula will take the following form:

Q cr = ( F - D) / (C pr - S lane),

Where D- non-monetary expenses.

Depending on the specific operating conditions of the enterprise, this formula can be significantly changed. For example, when there is a change in the balance sheet items of the enterprise’s working capital. The fact is that production volume is not always equal to sales volume, and the company ends up with leftover finished products in the warehouse. Changes in balances are also reflected in other items current assets:

• productive reserves;
• work in progress, etc.

In this regard, the question arises: what should be the planned sales volume in order to compensate for unplanned expenses in cash?

In this case, an increase in net current assets requires an increase in sales volume in order to compensate not only for current expenses associated with production and sales, but also for diverted funds into inventories, settlements with customers, etc. The acquisition of long-term assets also requires an increase in sales volume, with the exception of their acquisition using borrowed capital.

Calculation formula sales volume required to cover current and capital costs in cash, will have the following form:

Q cr = ( F - D ± N + I) / (C pr - S lane),

Where N— change in net current assets (increase - “+”, decrease - “-”);

I— investments in long-term assets.

Using this formula, you can determine at what sales volume in physical units the company will be able to cover current expenses in cash and make a profit sufficient to increase net current assets and planned long-term investments.

To illustrate what has been said, consider an example.

EXAMPLE 5

We use the data from the previous example for the main order. Let's assume that the company's net current assets are expected to increase by RUB 1.5 million. (due to an increase in stocks of raw materials and finished products). Accrued depreciation of the company's capital equipment (in fixed costs) is 500 thousand rubles.

In this case, the known sales volume (60 thousand units) turns out to be clearly insufficient. We can verify that this is indeed the case using the last formula:

Q kr = (2,000,000 - 500,000 + 1,500,000) / (100 - 60) = 3,000,000 / 40 = 75,000 units of products.

It follows: if a cumulative increase in inventory balances is expected by 1.5 million rubles, then the company will have to sell not 60 thousand pieces, but all 75 thousand pieces of products. And all in order to ensure a cash flow sufficient to cover current expenses (in cash) and finance the increase in current assets.

LET'S SUM UP

1. The larger the share in the cost structure of high-margin products (products with the maximum ratio of marginal income to price), the higher the level of marginal income for the company as a whole. Structural restructuring in favor of increasing the share of high-margin products contributes to the growth of sales profits.

2. To improve the sales structure and increase the profit of a company with limited resources, the priority of production of a particular type of product must be assessed based on the marginal income per unit of the limiting factor (for example, by the processing time of a unit of product in machine hours).

3. The company's acceptance of an additional order depends on the influence of the operating leverage effect, that is, on the ratio of variable and fixed costs. The influence can be positive and negative.

The positive impact of the operating leverage effect appears only after reaching a sales volume at which fixed costs are covered. Thus, the critical sales volume in the company is blocked.

4. To quantify the coverage of all current cash expenses of an enterprise due to sales growth, you can use a formula similar to that used to determine the critical sales volume. In this case, expenses that are not accompanied by an outflow of cash, primarily depreciation charges, are excluded from fixed expenses. This formula must take into account changes in the composition of current assets (inventories) and investments in long-term assets.

The goal of the company is to maximize profits. Profit(P) is the difference between revenue (TR) and the firm’s total costs (TC):

Since the market price in the revenue function (TR = P × Q) is beyond the control of a perfectly competitive firm, the latter's task is to determine the output at which its profit will be maximized.

Firm maximizes profit at such an output when its marginal revenue becomes equal to its marginal cost:

wherein optimal production volume

According to the rule of profit maximization, a firm producing products in volumes at which MR = MC receives the maximum possible profit at given prices, i.e. optimal production volume is the volume at which marginal cost (MC) and marginal revenue (MR) are equal.

The equality of MR and MC is condition for profit maximization for any firm, regardless of the market structure in which it operates (perfect or imperfect competition).

Equality MR = MC as a condition for maximizing profit can be justified logically. Each additional unit of output brings some additional income (marginal revenue), but also requires additional costs (marginal cost). As long as marginal revenue exceeds marginal cost, an additional unit of output increases profit.

Accordingly, at the moment when marginal cost equals marginal revenue, profit reaches maximum. A further increase in output, at which marginal costs exceed marginal revenue, will lead to a decrease in profit.

In its decisions, the company strives to achieve the best results - to get maximum profits at minimum costs. In this case, the company is said to be in a position equilibrium .

The equilibrium condition of the firm is the equality of marginal costs, marginal revenue and factor price:

The point at which the market price intersects the marginal cost curve determines the equilibrium position.

To the left of point E (Fig. 2) MC > MR, it is profitable for the company to increase production, because on each unit of production it receives more than it expends. Having produced less output than at point E, the firm incurs losses from underproduction.

Figure 2. Firm's equilibrium in production

To the right of point E MC > MR. For each additional unit of production, the company incurs losses, because its costs exceed its income. Increasing production to the right of point E is unprofitable. Hence, optimal production volume is Q 0 .

Thus, with production volume Q 0, the firm achieves maximum profit.

Hence. To achieve maximum profit, the firm must produce this volume of output. at which marginal revenue equals marginal cost.

The equality of marginal revenue and marginal costs characterizes the equilibrium of the firm in any market structure and is used to maximize profit. minimizing losses and obtaining zero economic profit.

Conclusions on question 3

The volume of production at which marginal revenue equals marginal cost (optimal production volume) ensures maximum profit. If the actual output volume is lower than optimal, then the company should expand production - profits will increase; If output is greater than optimal, then to increase profits the firm should reduce production.

To understand the essence of pure competition, it is necessary to understand the following provisions.

First position. Whenever a firm considers how much to change its output, it inevitably must answer two questions:

1. How will its gross income change as a result of changes in product output?

2. What will be the marginal (additional) income from the sale of one more unit of production?

To answer these questions, we need to introduce new concepts: gross income and marginal income:

1) gross income at any level of sales is determined as the product of the price and the quantity of products that the company can sell;

2) marginal income is additional income, which results from the sale of an additional unit of output.

Note that in pure competition, marginal revenue is constant because additional units of output will be sold at a constant price. This means that each additional unit of sales adds its price exactly to the gross income.

Second position. In conditions of pure competition, each firm strives to maximize profits. But the situation changes depending on the short-term and long-term periods. First, let's look at the situation in the short term.

In the short run, a competitive firm has constant constant resources, i.e. constant equipment, and therefore constant fixed costs. In this regard, the company tries to maximize its profits or minimize its losses (this may be the case), adapting its production volume to the market only through changes in the amount of variable resources (labor, materials, etc.) that it uses, and therefore, changes in the value of variable costs. The question arises: how can a company in such a situation determine the volume of production that brings maximum profit or minimum losses? There are two approaches to determining the volume of production at which a competitive firm will receive maximum profits or minimum losses.

First approach. A firm should compare gross revenue (TR) and gross costs (TC).

At fixed market price A competitive manufacturer faces three questions:

1. Should it be produced?

2. If it should be produced, what quantity?

3. What profit (or loss) will be made?

The answer to question 1: “Should I produce?” ? is: a firm should produce if it can make: a) an economic profit or b) a loss that is less than its fixed costs.

The answer to question 2: “How much to produce?” ? is obvious: the firm should produce only the volume of output that maximizes profits or minimizes losses.

Answer to Question 3: “What profit (or loss) will be made?” ? is:

A) the firm maximizes profit under the condition that gross income exceeds gross costs by the maximum amount, i.e. TR > TC;

B) the firm will minimize its losses provided that gross costs exceed gross income by the smallest amount (TCmin > TR) (see Fig. 23.2). If gross costs exceed gross income by a significant amount (TCmax > TR), then the firm will minimize losses by closing. She will eventually go bankrupt.

Rice. 23.2. Cases of profit maximization, loss and closure

From Fig. 23.2a shows that the company receives maximum profit in the case when gross income (TR) maximally exceeds gross costs (TC).

So, what are the conditions for maximizing profit in the short term: the first approach? The firm will maximize profit if gross revenue exceeds gross costs by the greatest amount. Losses are minimized provided that the excess of gross costs over gross income is minimal and, most importantly, less than total fixed costs.

From Fig. 23.2b shows that the firm will minimize its losses when gross costs (TC) exceed gross revenue (TR).

The firm will minimize losses in the short run through closure.

Second approach. The firm should compare marginal revenue (MR) and marginal cost (MC) of each subsequent unit of output (see Figure 23.3). General rule for firms: any unit of output should be produced if marginal revenue exceeds its marginal cost (MR > MC), because for each such unit of output the firm receives more income from its sale, than it adds to the costs of producing this unit. Similarly, if a unit's marginal cost exceeds its marginal revenue, then the firm should avoid producing that unit because it adds more to cost than to revenue. Consequently, such a unit of production will not pay for itself.

But the key to the rule that determines output in the short run is different: a firm will maximize profits or minimize losses only when marginal revenue equals marginal cost. This principle of profit maximization is called the MR rule? M.C.

If price (P) is replaced by marginal revenue (MR), then the rule will be as follows: to maximize profits or minimize losses, a competitive firm should produce at the point where price equals marginal cost (P? MC). Is this Rule R? Is MC just a special case of the MR rule? MS.

Question: Why should a company “break down” if MR? MS. It turns out there is a reason. And its essence is in total profit, that is, the company seeks to maximize its total profits, and not profit per unit of production. Therefore, if profit? revenue per unit of additional output (MR) ? marginal cost (MC) ? price (P), but the firm produces more, this means that its total profit will necessarily increase. A firm can easily accept lower profits per unit if the revenue from selling additional units compensates for the lower profits per unit. “So this is where the dog is buried!”

Therefore, when determining the actual profit or loss, price (P) and average gross costs (ATC) must be compared. A competitive firm will maximize profits or minimize losses in the short run by producing a level of output at which price exceeds minimum value average costs P > min ATS. Conversely, the firm suffers losses if the price is less than average gross costs P
From Fig. 23.2 shows that if marginal revenue (MR) is constant, then point E? the point of intersection of MK and MC shows that the volume of production at which P (price) is equal to MC, i.e. P? MS allows the manufacturer to maximize profits or minimize losses. We see that P > ATC. This indicates an increase in the total profit, indicated by the white rectangle