home » Cloth » Formula for cross price elasticity of demand. Cross price elasticity of demand

Formula for cross price elasticity of demand. Cross price elasticity of demand

You will need

-starting price of product 1 (P1)
-final price of product 1 (P2)
-initial demand for product 2 (Q1)
-final demand for product 2 (Q2)

Instructions

To estimate cross elasticity, two calculation methods can be used - arc and point. The point method for determining cross elasticity can be used when a relationship of dependent objects is derived (i.e. there is a demand function for any product). The arc method is used in cases where practical observations do not allow us to identify the functional relationship between the market indicators that interest us. In this situation, the market value is assessed when moving from one point to another (i.e., the initial and final value characteristic of interest to us).

A positive value is obtained if the calculation involves data from pairs of interchangeable goods. For example, cereals and pasta, butter and margarine, etc. When the price of buckwheat increased significantly, the demand for other products in this category increased: rice, millet, lentils, etc. If coefficient takes a zero value, this indicates the independence of the goods in question.

Keep in mind that coefficient cross elasticity is not the reciprocal. The magnitude of the change in demand for product x price for product y is not equal to the change in demand for product y by price X.

Video on the topic

Demand is one of key concepts economy. It depends on many factors: the price of the product, consumer income, the availability of substitutes, the quality of the product and taste preferences buyer. Greatest dependence is revealed between demand and price level. Elasticity demand By price shows how much consumer demand changes with an increase (decrease) in price by 1 percent.

Instructions

Definition of Elasticity demand necessary for making decisions about setting and revising prices for goods and. This makes it possible to find the most successful course in pricing policy from the point of view of economic benefits. Using Elasticity Data demand allows us to identify the consumer’s reaction, as well as direct production to the upcoming change demand and adjust the occupied share to .

Elasticity demand By price determined using two coefficients: direct elasticity coefficient demand By price and cross elasticity coefficient demand By price.

Direct elasticity coefficient demand By price is defined as the ratio of volume change demand(in relative terms) to the relative change in price by . This coefficient shows whether demand increased (decreased) when the price of a product changed by 1 percent.

The direct elasticity coefficient can take several values. If it is close to infinity, then this indicates that when the price decreases, buyers demand by an indefinite amount, but when the price increases, they completely refuse to purchase. If the coefficient exceeds one, then the increase demand occurs at a faster rate than the price decreases, and vice versa, demand decreases at a faster rate than the price. When the direct elasticity coefficient is less than one, the opposite situation arises. If the coefficient is equal to one, then demand grows at the same rate as the price decreases. When the coefficient is zero, the price of the product has no effect on consumer demand.

Cross elasticity coefficient demand By price shows how much the relative volume has changed demand for one product when the price changes by 1 percent for another product.

If this coefficient is greater than zero, then the goods are considered interchangeable, i.e. an increase in prices by one will invariably lead to an increase demand another. For example, if the price of butter increases, the demand for vegetable fat may increase.

If the cross elasticity coefficient is less than zero, then the goods are complementary, i.e. When the price of one good increases, the demand for another decreases. For example, when prices rise, the demand for cars. When the coefficient is zero, the goods are considered independent, i.e. a perfect change in the price of one product does not affect the quantity demand another.

Video on the topic

Price, demand, elasticity- all these concepts are included in one colossal public sphere - the market. Historically, it has been the most important economic substitute. In other words, the market is an arena, and the people in it are the players.

Instructions

The greatest elasticity of demand is for goods whose production requires, and therefore very expensive, materials. Such products include jewelry whose elasticity coefficient is much greater than one.

Example: determine the elasticity of demand for potatoes if it is known that average income consumers over the year increased from 22,000 rubles to 26,000, and the sales volume of this product increased from 110,000 to 125,000 kg.

Solution.
In this example, you need to calculate the income elasticity of demand. Use the ready-made formula:

Cad = ((125000 - 110000)/125000)/((26000 - 22000)/26000) = 0.78.
Conclusion: the value of 0.78 lies in the range from 0 to 1, therefore, this is an essential product, demand is inelastic.

Another example: find the elasticity of demand for fur coats with the same income indicators. Sales of fur coats increased compared to the year from 1000 to 1200 products.

Solution.
Cad = ((1200 - 1000)/1200)/((26000 - 22000)/26000) = 1.08.
Conclusion: Cad > 1, this is a luxury item, demand is elastic.

Consumer demand determines product supply, since it is their own needs that motivate buyers to pay. The dynamics of this phenomenon are determined by many factors, so with any changes it is necessary to find elasticity demand.

Demand for a product changes under the influence of price changes in the markets for substitute and complementary goods. Quantitatively, this dependence is characterized by the coefficient of cross price elasticity of demand, which shows how the quantity of demand for a given product will change when the price of another product changes. The formula for calculating the coefficient of cross elasticity of demand for product A depending on changes in the price of product B is as follows:

Calculating the coefficient of cross price elasticity of demand allows you to answer by how many percent the quantity of demand for product A will change if the price of product B changes by one percent. Calculating the cross-elasticity coefficient makes sense primarily for substitute and complementary goods, since for weakly interrelated goods the value of the coefficient will be close to zero.

Let's remember the example of the chocolate market. Let's say we also conducted observations of the halva market (a product that is a substitute for chocolate) and the coffee market (a product that is a complement to chocolate). Prices for halva and coffee changed, and as a result, the volume of demand for chocolate changed (assuming all other factors remain unchanged).

Applying formula (6.6), we calculate the values of the coefficients of cross price elasticity of demand. For example, when the price of halva is reduced from 20 to 18 den. units demand for chocolate decreased from 40 to 35 units. The cross elasticity coefficient is:

Thus, with a decrease in the price of halva by 1%, the demand for chocolate in a given price range decreases by 1.27%, i.e. is elastic relative to the price of halva.

Similarly, we calculate the cross elasticity of demand for chocolate with respect to the price of coffee if all market parameters remain unchanged and the price of coffee decreases from 100 to 90 deniers. units:

Thus, when the price of coffee decreases by 1%, the quantity of demand for chocolate increases by 0.9%, i.e. The demand for chocolate is inelastic relative to the price of coffee. So, if the coefficient of elasticity of demand for good A with respect to the price of good B is positive, we are dealing with substitute goods, and when this coefficient is negative, goods A and B are complementary. Goods are called independent if an increase in the price of one good does not affect the amount of demand for another, i.e. when the cross elasticity coefficient is zero. These provisions are only true when small changes prices If price changes are large, then the demand for both goods will change under the influence of the income effect. In this case, products may be incorrectly identified as complements.

Income Elasticity of Demand

The previous chapter examined the dependence of demand on consumer income. For normal goods, the higher the consumer's income, the higher the demand for the product. For lower category goods, on the contrary, more income, the less demand. However, in both cases, the quantitative measure of the relationship between income and demand will be different. Demand may change faster, slower, or at the same rate as consumer income, or not at all for some goods. The income elasticity of demand coefficient, which shows the ratio of the relative change in the quantity of demand for a product and the relative change in consumer income, helps determine the measure of the relationship between consumer income and demand:

Accordingly, the coefficient of income elasticity of demand can be less than, greater than or equal to one in absolute value. Demand is income elastic if the quantity of demand changes to a greater extent than the quantity of income (E0/1 > 1). Demand is inelastic if the quantity demanded changes less than the quantity of income (E0/ [< 1). Если величина спроса никак не изменяется при изменении величины дохода, спрос является абсолютно неэластичным по доходу (. Ед // = 0). Спрос имеет единичную эластичность (Ео/1 =1), если величина спроса изменяется точно в такой же пропорции, что и доход. Спрос по доходу будет абсолютно эластичным (ЕО/Т - " со), если при малейшем изменении дохода величина спроса изменяется очень сильно.

In the previous chapter, the concept of the Engel curve was introduced as a graphical interpretation of the dependence of the quantity of demand on the consumer’s income. For normal goods the Engel curve has a positive slope, for goods of the lowest category it has a negative slope. The income elasticity of demand is a measure of the elasticity of the Engel curve.

The income elasticity of demand depends on the characteristics of the product. For normal goods, the income elasticity of demand is positive sign(Eо/1 > 0), for goods of the lowest category - negative sign(-Unit //< 0), для товаров первой необходимости спрос по доходу неэластичен (ЕО/Т < 1), для предметов роскоши - эластичен (Е0/1 > 1).

Let's continue our hypothetical example with the chocolate market. Let's say we observed changes in the incomes of chocolate consumers and, accordingly, changes in the demand for chocolate (we will assume all other characteristics unchanged). The observation results are listed in Table 6.3.

Let us calculate the elasticity of demand for chocolate with respect to income on the segment where the amount of income grows from 50 to 100 deniers. units, and the quantity of demand - from 1 to 5 units. chocolate:

Thus, in this segment, the demand for chocolate is income elastic, i.e. When income changes by 1%, the quantity demanded for chocolate changes by 2%. However, as income increases, the elasticity of demand for chocolate decreases from 2 to 1.15. This has a logical explanation: at first, chocolate is relatively expensive for the consumer, and as income increases, the consumer significantly increases the volume of chocolate purchases. Gradually, the consumer becomes saturated (after all, he cannot eat more than 3-5 bars of chocolate per day; among other things, it is unsafe for health), and further growth in income no longer stimulates the same growth in demand for the product. If we continued our observations, we could see that at very high incomes, the demand for chocolate becomes income inelastic (Eo/1< 1), а потом и вовсе перестает реагировать на изменение дохода (Еп/1 - " 0). Вид кривой Энгеля для этого случая представлен на Рис.6.6.

Ш Let's consider the relationship between consumer income and their demand using the example of the Republic of Belarus. Table 6.4 shows data on the cash income of households in the country in different years and information on household consumption patterns. Since price indicators fluctuated significantly due to inflation and other factors, we are interested in percentage changes in real incomes of consumers and changes in the structure of consumption.

Cross (mutual) elasticity of demand also deserves attention, which expresses the degree of sensitivity of demand for a certain product to changes in the price of another product. The cross elasticity coefficient shows by what percentage the demand for a given product will change when the price of another product changes by 1%:

Where is the relative change in demand for product X; - relative change in the price of product Y.
The sign of the cross elasticity coefficient depends on whether the goods are substitutes, complements, or neutral to each other. These options are shown in Fig. 10.3.

Curve B (Exy Curve C (Exy> 0) reflects positive cross elasticity: with an increase in the price of product Y, the volume of demand for product X increases, i.e., there is a switch in demand from product Y to product X. In this
In this case, goods are interchangeable (substitutes), for example, bus and subway, sweets and cakes, coffee and tea.
Curve D (E xy = 0) expresses zero or close to zero cross elasticity: a change in the price of product Y has no or very little effect on the demand for product X. Such goods are called independent, or neutral, for example, an increase in the price of hats is unlikely to affect demand for boots.
Consequently, the concept of elasticity of demand is very useful in studying the reaction of consumers under the influence of certain factors. Depending on the degree of elasticity of demand, entrepreneurs can predict and determine the behavior of their enterprises.
The problem of studying demand is not only a problem for buyers and sellers, who must have sufficient information about the dynamics of demand for manufactured goods. Demand is also of interest to government agencies, primarily the tax system, since it is necessary to know how an increase or decrease in tax rates can affect changes in demand, which will ultimately affect a reduction or increase in tax revenues to the budget. IN in this case we're talking about about indirect taxes, or taxes that are included in the prices of goods. These are excise taxes on goods of low elastic demand (salt, matches), or goods considered harmful from the point of view of society (alcohol, tobacco), or value added tax. This aspect of demand elasticity is discussed below in relation to supply elasticity.

You can also find information of interest in electronic library Sci.House. Use the search form:

Price Elasticity of Demand

Price Elasticity of Demand shows by what percentage the quantity demanded will change when the price changes by 1%. The price elasticity of demand is influenced by the following factors:

§ Availability of competitor products or substitute products (the more there are, the more more opportunity find a replacement for a product that has become more expensive, that is, higher elasticity);

§ Unnoticeable price level changes for the buyer;

§ Conservatism of buyers in tastes;

§ Time factor (the more time the consumer has to choose a product and think about it, the higher the elasticity);

§ Specific gravity goods in consumer expenses (the greater the share of the price of the goods in consumer expenses, the higher the elasticity).

Cross elasticity of demand

(cross elasticity of demand)

It is the ratio of the percentage change in demand for one good to the percentage change in the price of some other good. A positive value means that these goods are interchangeable (substitutes), negative meaning shows that they are complementary (complements).

where the upper index means that this is the elasticity of demand, and the lower index indicates that this is the cross elasticity of demand, where and means any two goods. That is, cross elasticity of demand shows the degree of change in demand for one good () in response to a change in the price of another good (). Depending on the values of the receiving variables, I distinguish the following connections between goods and:

28)))Elasticity of supply, factors determining it

Supply elasticity is an indicator that reproduces changes aggregate supply that occur due to rising prices. In the case when the increase in supply exceeds the increase in prices, the latter is characterized as elastic (elasticity of supply is greater than one - E> 1). If the increase in supply is equal to the increase in prices, supply is called unit, and the elasticity indicator is equal to one (E = 1). When the increase in supply is less than the increase in prices, the so-called inelastic supply is formed (elasticity of supply is less than one - E<1). Таким образом, эластичность предложения характеризует чувствительность (реакция) предложения товаров на изменения их цен.

Supply elasticity is calculated through the supply elasticity coefficient using the formula:

K m - supply elasticity coefficient
G - percentage change in the quantity of goods offered
F - percentage of price change

The elasticity of supply depends on factors such as the specifics of the production process, the time of production of the product and its ability to be stored for a long time. Features of the production process allow the manufacturer to expand production of a product when the price increases, and when its price decreases, it switches to the production of other products. The supply of such a product is elastic.

The elasticity of supply also depends on the hour factor, when the manufacturer is not able to quickly respond to price changes, since additional production of the product requires considerable time. For example, it is almost impossible to increase the production of cars in a week, although their price can increase many times over. In such cases, supply is inelastic. For a product that cannot be stored for a long time (for example, products that spoil quickly), the elasticity of supply will be low.

Many economists identify the following factors that change supply. Changes in production costs due to resource prices, changes in taxes and subsidies, advances in science and technology, and new technologies. Reducing costs allows the manufacturer to deliver more goods to the market. An increase in cost leads to the opposite result - supply decreases. Changes in prices for other goods, in particular for substitute goods. Individual tastes of consumers. Prospective expectations of manufacturers. With forecasts regarding rising prices in the future, producers may reduce supply in order to soon sell the product at a higher price, and conversely, the expectation of falling prices forces producers to get rid of the product as soon as possible so as not to incur losses in the future. The number of commodity producers directly affects supply, since the more suppliers of goods, the higher the supply and vice versa, with a decrease in the number of producers, supply sharply decreases.

29))) Violations of market price equilibrium.

In a competitive system, equality of supply and demand leads to

equilibrium in all markets. However, the equilibrium price may change

(the equilibrium point shifts in one direction or another). Some impacts

it is impossible to predict the market equilibrium of prices, the influence of others should be taken into account

difficult because they only move the equilibrium point without breaking the laws

supply and demand. Recent impacts include, for example,

taxation.

Tax is one of the economic levers of market regulation.

By shifting the equilibrium price point, the tax does not violate the laws of demand and

offers.

Tax and equilibrium market price.

Taxation is the prerogative of the state applying

many types of direct and indirect taxes. Consequences

taxes have a negative impact on both consumers and

manufacturers of goods. These consequences are reflected in an increase in price

goods, on the one hand, and in reducing the volume of production of goods – on the

another. An increased price, as is known, causes a reduction in consumer consumption.

demand, resulting in an inevitable reduction in the volume of sales of goods,

subject to taxation. Manufacturers will respond to this situation

unequivocally: they will reduce the production and presentation of goods to the market,

demand for which has decreased.

There was no violation of the laws of supply and demand, since the tax

only created the prerequisites for moving the equilibrium point of demand and

proposals to a new, higher level.

30))) Resource markets are in many ways similar to goods markets,

the functioning of which was discussed earlier.

Theories of supply and demand, categorical

the apparatus of limit analysis is applicable to markets

resources in the same way as to commodity markets.

However, if in commodity markets producers

of goods are firms, and consumers are

households, then in resource markets it is the other way around.

Households own and supply resources

in the markets.

Each resource has an owner who

receives income from the use of this

Resource Owner Income

Labor Employee Salary

Land Landowner Rent

Capital Capitalist Interest

Information

(entrepreneurial

capabilities)

Entrepreneur Profit

Resource costs for firms are costs

production.

Every company that wants to maximize its

profit, strives to reduce costs,

purchasing production resources from

minimal costs.

The company prefers to purchase more

productive resource.

The price of resources is determined on the market under the influence of demand for

resources and their offers.

The company forms its demand for resources based on three factors:

demand for finished products, resource prices and its

productivity. The most important of these three factors is demand.

for finished products. If there is no demand for the product,

produced from a resource, then no matter how productive or

No matter how cheap the resource is, there will be no demand for it.

The demand for resources is derived (dependent) from the demand for

finished products. The higher the demand for finished products, the higher

demand for the resources from which it is produced.

The supply of resources depends primarily on the quantity

available resources, prices for them, as well as the degree of their

interchangeability.

The production costs discussed above represent the costs of resources purchased by firms in resource markets. The same laws of supply and demand and the same market pricing mechanism operate in these markets. However, resource markets, to a greater extent than final product markets, are influenced by non-economic factors - the state, trade unions, other public organizations (green movement, etc.).

The prices of resources that are formed in the relevant markets determine:

Income of resource owners (for the buyer, price is a cost, expense; for the seller, it is income);

Resource allocation (obviously, the more expensive a resource is, the more efficiently it should be used; thus, resource prices contribute to the allocation of resources between industries and firms);

The level of production costs of a company, which with a given technology are entirely dependent on the prices of resources.

In the resource market, the sellers are households who sell their property to enterprises. primary resources – labor, entrepreneurial skills, land, capital and firms that sell each other so-called intermediate products - goods necessary for the production of other goods (timber, metal, equipment, etc.). Firms act as buyers in the resource market. Market demand for resources is the sum of the demands of individual firms. What determines the demand for resources presented by an individual firm?

The demand for resources depends on:

demand for goods, in the production of which certain resources are used, i.e. demand for resources is derived demand. Obviously, if the demand for cars grows, then their price rises, output increases and the demand for metal, rubber, plastic and other resources increases;

the maximum productivity of the resource, measured, recall, by the marginal product ( MR). If buying a machine gives a greater increase in output than hiring one worker, then, obviously, the company, other things being equal, will prefer to buy the machine.

Taking these circumstances into account, each company, when presenting a demand for resources, compares the income that it will receive from the acquisition of a given resource with the costs of acquiring this resource, i.e. is guided by the rule:

MRP = MRC,

MRP marginal profitability of the resource;

MRC marginal cost of a resource.

Marginal profitability of a resource or the marginal product of a resource in monetary terms characterizes the increase in total income as a result of the use of each additional unit of input resource. By purchasing a unit of resource and using it in production, the firm will increase its production volume by the value of the marginal product ( MP). Selling this product (at price R), the firm will increase its income by an amount equal to the proceeds from the sale of this additional unit, i.e.

MRP = MP × p.

Thus, MRP depends on resource performance and price products.

Marginal cost of a resource characterize the increase in production costs due to the acquisition of an additional unit of resource. Under conditions of perfect competition, this increase in costs equal to price resource.

31)))Labor market and wages.

The labor market is an integral part of the market economy. This is a socio-economic form of movement of labor resources, a way of including labor in the economic system. In a market economy, labor acts as a commodity and can be assessed and optimized. The labor market is characterized by a system of relations between buyers (employers), sellers (owners of labor) and infrastructure.

The main subjects of the labor market: the employee and the employer with their own specific forms and structure. They are supplemented by intermediaries.

Principles of functioning of the labor market:

Labor demand is the solvent need of employers for the labor services of workers of certain professions and qualifications. Determined by the needs of enterprises, aggregate demand, and technical equipment of production. Labor costs are more important than equipment costs.

Labor supply is the number of people in need of employment, determined by the amount of working time that labor force carriers agree to work, subject to a certain level of remuneration (sources - graduates; laid off; those who have not previously worked or were engaged in housework). It is determined by the level of wages, the tax system, culture and religion, the strength of trade unions, the amount of unemployment assistance, and child care.

Unemployment is a situation where the supply of labor exceeds the demand for it; shortage in the labor market - when demand exceeds supply, negative consequences in both cases of imbalance.

Wages are the price of labor power. It is influenced by: the cost of labor power - the cost of subsistence is taken into account. Minimum wage, maximum; skill level - difficult work requires better living conditions (high cost); national differences - social conditions, degree of economic development; state - part of the necessary product in the form of taxes is allocated to social protection, development of the social sphere; market conditions labor - the relationship between demand and supply of labor. Forms of wages - hourly, working hours, nominal, real.

32)))Land market and rent. Capital market and interest.

The land market is a market for natural resources necessary for the production of goods and services. Natural resources are everything that can be used in production in its natural state: fertile lands, free space for construction, forests, minerals, etc. A feature of land supply is its absolute inelasticity. The income of the owner of the land is called rent or ground rent. The income received from a factor of production that has perfectly inelastic supply is called pure economic rent.

Rent is the income resulting from the use of a resource at a higher productivity, provided that its supply is inelastic.

Land ownership means recognition of the right of a given (individual or legal) person to a certain plot of land on historical grounds. Most often, land ownership refers to the right to own land. Land tenure is carried out by land owners.

Land use is the use of land in the manner established by custom or law. The user of land is not necessarily its owner. In real economic life, subjects of land ownership and land use are often represented by different individuals (or legal entities).

The capital market is part of the financial market in which long-term money circulates, that is, money with a circulation period of more than a year. In the capital market, free capital is redistributed and invested in various profitable financial assets. The forms of circulation of funds (financial resources) in the capital market can be different: bank loans (loans); stock; bonds; financial derivatives.

Bank loan (credit) is a monetary loan issued by a bank for a certain period on the terms of repayment and payment of interest.

Loan - the transfer of money, things and other property by the lender to the borrower under a loan agreement or under an agreement for gratuitous use on the terms of return.

A share is an issue-grade security that secures the rights of its owner (shareholder) to receive part of the profit of the joint-stock company in the form of dividends, to participate in the management of the joint-stock company and to part of the property remaining after its liquidation. Typically, a share is a registered security.

A bond is an issue-grade debt security, the owner of which has the right to receive from the issuer of the bond its nominal value in cash or in the form of another property equivalent within a specified period. A bond may also provide for the owner's right to receive a fixed percentage (coupon) of its face value or other property rights.

Derivative is an agreement (contract) that, in accordance with its terms, provides for the parties to the contract to exercise rights and/or fulfill obligations associated with changes in the price of the underlying asset underlying this financial instrument, and leading to a positive or negative financial result for each party .

Interest income (interest) is the return on capital invested in a business. This income is based on the costs of alternative use of capital (money always has alternative uses, for example, it can be put in a bank, spent on stocks, etc.). The amount of interest income is determined by the interest rate, i.e. the price a bank or other borrower must pay a lender for the use of money for a specified period.

33)))Output: total average and marginal product. Law of Diminishing Returns

PRODUCTION VOLUME is the result of the enterprise’s activities in the production of any product and provided production services.

In order to reflect the influence of a variable factor on production, the concepts of aggregate (total), average and marginal product are introduced.

Total product (TP) is the quantity of an economic good produced using some quantity of a variable factor.

The marginal product (MP) of a variable factor of production is the increase in output obtained by using an additional unit of this factor. The marginal product characterizes the marginal productivity of a given factor of production.

The Law of Diminishing Returns, or the Law of Diminishing Marginal Product, or the Law of Changing Proportions, are all different names for the same law.

The Law of Diminishing Returns states that as the use of a factor of production increases (holding other factors of production fixed), a point is eventually reached at which additional use of that factor leads to a decrease in output.

The Law of Diminishing Returns states that, after a certain point, the successive addition of units of a variable resource (such as labor) to a fixed, fixed resource (such as capital or land) produces a diminishing surplus, or marginal, product for each subsequent unit. variable resource.

In other words, if the number of employees serving a given area of activity increases, then the growth in production volume will occur after a certain point more and more slowly, as the number of workers in production increases.

34)))Production costs, their types. Positive and diseconomies of scale

Production costs are expenses, monetary expenditures that must be made to create a product. For an enterprise (firm), they act as payment for acquired factors of production. These types of expenses cover payment for materials (raw materials, fuel, electricity), wages of employees, depreciation, and costs associated with production management. When selling a product, the entrepreneur receives cash proceeds. One part of it compensates for production costs (i.e., the costs of money associated with the production of goods), the other provides profit, the reason for which production is organized. This means that production costs are less than the cost of the product by the amount of profit. Thus, production costs are the costs of producing a given finished product, as opposed to one-time costs associated with the advance of capital that is needed to initially organize the production process.

Opportunity "explicit" and "implicit" costs

Opportunity Cost- these are the costs of producing a product, assessed in terms of the lost opportunity to use the same resources for other purposes. Opportunity costs that firms face include payments to workers, investors, and natural resource owners. All these payments are made to attract factors of production, diverting them from alternative uses.
From an economic point of view, opportunity costs can be divided into two groups: “explicit” and “implicit”.

Explicit costs- These are opportunity costs that take the form of cash payments to suppliers of factors of production and intermediate goods. Explicit costs include: workers' wages; payment of transportation costs; communal payments; payment for services of banks and insurance companies; payment to suppliers of material resources. Implicit costs- these are the opportunity costs of using resources owned by the company itself, i.e., unpaid costs.

Production costs, including normal or average profit, are economic (opportunity) costs.

Domestic costs are those associated with the use of one’s own products, which turn into a resource for the company’s further production. External costs are the costs of money that are made to acquire resources that are the property of those who are not the owners of the company. The costs that a firm incurs in producing a given volume of output depend on the possibility of changing the quantity of all employed resources.
Fixed costs are costs that do not depend in the short term on how much the company produces. They represent the costs of its constant factors of production. Permanent costs are associated with the very existence of the firm's production equipment and must therefore be paid even if the firm does not produce anything. A firm can avoid the costs associated with its fixed factors of production only by completely ceasing its activities. Fixed costs that cannot be avoided even if the business ceases are called irrevocable costs. The cost of renting premises for a company's office is considered a fixed cost, which is not sunk, since the company can avoid these costs by ceasing its activities. But if a firm temporarily closes, it can avoid paying for any variable factor of production. Variables costs are costs that depend on the firm's output. They represent the costs of the firm's variable factors of production. These include costs of raw materials, fuel, energy, transportation services, etc. The majority of variable costs typically come from labor and materials. To understand whether producing an additional unit of output is profitable, it is necessary to compare the resulting change in income with the marginal cost of production. Limit costs are the costs associated with producing an additional unit of output.

Economies of scale associated with changes in the cost of a unit of output depending on the scale of its production by the company. Considered in the long term. Reducing costs per unit of production as production is enlarged is called economies of scale. The shape of the long-term cost curve is associated with economies of scale in production.

Positive Economies of scale occur when, as the number of products produced and the level of influence in the market increases, unit costs decrease. Usually associated with a deepening division of labor. Thanks to this effect, the transition from manual labor to manufacture and then to the assembly line with a simultaneous increase in production turned out to be very profitable. It also becomes possible to use expensive technologies and produce by-products from waste. As long as there is a positive effect of scale, the company should increase its production capacity.

Negative effect of scale. The opposite of the positive effect, in which average costs increase along with the growth of the enterprise. Associated with some loss of controllability and decreased flexibility in responding to changes in the external environment, and an increase in intra-organizational contradictions. It is observed due to technical reasons during mining, due to the fact that it is more difficult to extract each subsequent ton of coal or barrel of oil from the ground than the previous one.

35)))Enterprise income: total, average and marginal income

Enterprise income is an increase in economic benefits as a result of the receipt of assets (cash, other property) and (or) repayment of liabilities, leading to an increase in the capital of the enterprise of this enterprise, with the exception of contributions of participants (owners of property).

Receipts from other legal entities and individuals are not recognized as income:
tax amounts;
under a commission agreement and other similar agreements in favor of the principal, etc.:
in advance payment for products, works, services;
deposit, pledge;
loan repayment.

Total income is the amount of revenue that a company receives from the sale of goods on the market. In general, a firm sells a product at different prices and, therefore, total revenue can be represented as the sum of the revenue received at each price, which is equal to the product of the price of the product and the number of units sold:

Average income is the total income per unit of production:

Marginal revenue represents the increase in the firm's total revenue resulting from the sale of an additional unit of goods:

36)))Profit, its types, profit maximization

Profit - acts as the excess of income from the sale of goods (services) over costs incurred (capital).

Profit is one of the general assessment indicators of the activities of enterprises (organizations, institutions).

Currently, the following types of profit are distinguished:

Balance sheet profit or loss is the amount of profit or loss received from the sale of financial activities, products, income from other non-operating operations, and they are reduced by the amount of all expenses for these operations.

Profit from common types activities or from the sale of works, services, products. It is the difference between all proceeds from the sale of products at current prices without special taxes, excise taxes, VAT and the costs of producing and selling them.

Profit or loss from financing activities and from other non-operating transactions is the result of transactions that are the difference between the amount of all received and paid penalties, fines, penalties, interest, exchange rate differences on all currency accounts, past losses and profits that were identified in the reporting year, and so on.

Taxable profit is the difference between book profit and the sum of rental payments, income taxes, import and export taxes.

Clean profits are directed to social and industrial development, the creation of reserve funds, material incentives for all workers, the payment of various economic sanctions to the budget, charity, and so on.

Consolidated profit, consolidated across all financial statements on the activities and, in addition, the financial results of subsidiaries and parent enterprises.

Maximization profit - represents the difference between the marginal revenue from the sale of an additional unit of output and the marginal cost.

Limit costs - additional costs leading to an increase in output by one unit of good. Marginal costs are entirely variable costs because fixed costs do not change with output. For a competitive firm, marginal cost equals the market price of the product.

In the case of profit maximization, the difference between the proceeds from its sale and total costs reaches a maximum. Maximization of the total profit of an enterprise occurs when the price of a product becomes equal to the marginal costs of its production and circulation.

Cross Elasticity demand (Cross elasticity of demand) characterizes the relative change in the volume of demand for one product when the price of another changes. The concept of cross elasticity of demand is used to determine the degree to which the quantity of demand for a given product is affected by changes in the price of another product.

The coefficient of cross price elasticity of demand is the ratio of the relative change in demand for the i-th product to the relative change in the price of the j-th product.

If EijD > 0, then goods i and j are called interchangeable (substitutes), an increase in the price of the j-th product leads to an increase in demand for the i-th (for example, different kinds fuel).

If EijD< 0, то товары i и j называют взаимодополняющими (комплементами), повышение цены j-того товара ведет к падению спроса на i-тый (например, автомашины и бензин).

If EijD = 0, then such goods are called independent; an increase in the price of one product does not affect the volume of demand for another (for example, bread and cement). Where Qi is the quantity of the i-th product, then Pj is the price of the j-th product.

If the price of a substitute product changes, the cross-elasticity coefficient will be greater than zero (for example, an increase in prices for beef meat will cause an increase in demand for poultry meat).

When the price of a complimentary product changes, the cross-elasticity coefficient will be less than zero (for example, an increase in the price of gasoline leads to a decrease in the demand for cars).

Using the formula, we calculate the values of the coefficients of cross price elasticity of demand. For example, when the price of halva is reduced from 20 to 18 den. units demand for chocolate decreased from 40 to 35 units. The cross elasticity coefficient is:

Thus, with a decrease in the price of halva by 1%, the demand for chocolate in a given price range decreases by 1.27%, i.e. is elastic relative to the price of halva. Similarly, we calculate the cross elasticity of demand for chocolate with respect to the price of coffee if all market parameters remain unchanged and the price of coffee decreases from 100 to 90 deniers. units:

Thus, when the price of coffee decreases by 1%, the quantity of demand for chocolate increases by 0.9%, i.e. The demand for chocolate is inelastic relative to the price of coffee. So, if the coefficient of elasticity of demand for good A with respect to the price of good B is positive, we are dealing with substitute goods, and when this coefficient is negative, goods A and B are complementary. Goods are called independent if an increase in the price of one good does not affect the amount of demand for another, i.e. when the cross elasticity coefficient is zero. These provisions are only valid for small price changes. If price changes are large, then the demand for both goods will change under the influence of the income effect. In this case, products may be incorrectly identified as complements.

The value of the cross-elasticity coefficient depends on whether the goods are considered interchangeable or complementary. If the goods are substitutes, the cross elasticity coefficient will be positive. Thus, a rise in the price of butter will cause an increase in demand for margarine, a decrease in the price of Borodino bread will lead to a reduction in demand for other types of black bread. If the goods are complementary, such as gasoline and cars, cameras and film, the quantity demanded will change in the direction opposite to the change in prices, and the elasticity coefficient will be negative.

Rice.

By measuring cross elasticity, one can determine whether the selected goods are complementary or substitutable and, accordingly, how a change in the price of one type of product produced by a firm can affect the demand for other types of products of the same firm. Such calculations will help evaluate decisions on changes in prices for manufactured products.

Cross elasticity is widely used in antitrust policy: evidence that a company is not a monopolist of a particular product is the fact that the product produced by this company has a positive cross elasticity of demand with the product of another company.

Views