The value of marginal revenue in an imperfectly competitive market. Income concept
Column 3 shows that gross income grows, despite the price decrease, up to the sale of 11 units of goods and reaches a maximum, i.e., $231. The monopolist reduces the price, but expands the volume of sales. But starting from the 12th unit of the product, when the price drops to $19 and further, gross income begins to decrease. Now the loss from lower prices is no longer offset by the gain from expanding sales: gross income is consistently declining. Graphically, the dynamics of gross income are shown in Fig. 1.2.
The gross income curve of a firm with imperfect competition has a “hilly” appearance.
The same graph also shows the gross cost curve. (TS). The maximum total profit will be at such a volume of output when the difference between TR And TS maximum. This can be seen from the graph in Fig. 1.2: maximum distance between TR And TS will correspond to the distance between points A And IN, i.e. when 9 units are produced. products. There is no need to confuse maximum gross income and maximum total profit: when releasing 11 units. the greatest volume is achieved TR, but the maximum profit will be achieved at 9 units. products.
Rice. 1.2. Gross income and gross
monopolist costs Fig. 1.3. Ask marginal revenue monopolist
An alternative way to determine the profit maximum requires comparing marginal revenue (M R ) And marginal cost (MS). Let us recall once again that in conditions of perfect competition, the price for an individual firm is a constant value and set by the market. But what is the marginal revenue?
Marginal revenue is the additional income from the sale of additional specific unit of goods. It is defined as the difference between TR n And TR n -1 , (see Table 2, column 4), i.e. M R = TR n - TR n -1 .
If the firm is a perfect competitor, or “price taker,” then it will sell each additional unit of the good at the same constant price. For example, 1 unit. retails for $41, 2 units. at the same price will bring gross income of $82 (41x2). Marginal Revenue ( M R) when selling 2 units will be $82 - $41 = $41. When selling 3 units at a price of $41, gross income will be $123 (41x3), therefore, M R will again be $41, since $123 - $82 = $41. Thus, we can conclude: under conditions of perfect competition, marginal revenue is equal to the price of the product, i.e. M R = R.
What will it be like M.R. with imperfect competition?
Let us depict graphically (see Fig. 1.3) the dynamics of marginal income and demand under conditions of imperfect competition (on the y-axis - marginal income and price, on the x-axis - quantity of production).
From the graph in Fig. 1.3 it is clear that M.R. declining faster than demand D . Under imperfect competition, marginal revenue is less than price ( M.R. <Р). After all, in order to sell an additional unit of output, an imperfect competitor reduces the price. This decrease gives him some gain (Table 2 shows that gross income increases), but at the same time brings certain losses. What kind of losses are these? The fact is that, having sold, for example, the 3rd unit for $37, the manufacturer thereby reduced the price of each of the previous units of production(from 41 to 39 and from 39 to 37 dollars). Therefore, all buyers now pay a lower price, including those who would have bought the goods for both $41 and $39. The loss on the previous units would be $4 ($2 x 2). This loss is subtracted from the price of $37, resulting in a marginal revenue of -$33.
Relationship fig. 1.2 and 1.3 is as follows: after gross income reaches its maximum, marginal income becomes negative. This pattern will help us subsequently understand at what part of the demand curve the monopolist sets the profit-maximizing price. Please also note that in the case of a linear demand curve D schedule MK intersects the x-axis exactly in the middle of the distance between zero and the quantity demanded at zero price.
Let's look again at the firm's costs. It is known that average costs (AS) initially, when the number of units of production increases, tends to decrease. However, subsequently, when a certain level of production is achieved and exceeded, average costs begin to rise. The dynamics of average costs, as is known, has the form of a U-shaped curve. Using an abstract digital example, let us depict the dynamics of average, total (gross) and marginal costs of an imperfect competitor firm. But first, let us once again recall the following notation:
TS = Q X AC, (1)
that is, gross costs are equal to the product of the quantity of goods and average costs;
MS = TS n – TS n -1 , (2)
i.e. marginal costs are equal to the difference between gross costs P units of goods and gross costs n-1 units of goods;
TR = Q X P , (3)
that is, gross income is equal to the product of the quantity of goods and its price;
M.R.
=
TR n
–
TR n
-1
,
(4)
that is, marginal revenue is equal to the difference between the gross income from the sale of n units of goods and the gross income from the sale of i-1 units of goods.
Columns 2, 3, 4 (Table 3) characterize the production conditions of the monopolist firm, and columns 5, 6, 7 - the sales conditions.
Quantity of goods, types of costs, price and types of income
| 1 | 2 | 3 | 4 | 5 | 6 | 7 |
| Q | AC | TS | MS | R | TR | MR |
| Number of units produced goods | Average costs | Gross costs | Marginal cost | Price | Gross income | Marginal Revenue |
| 1 | 24 | 24 | 24 | 41 | 41 | 41 |
| 2 | 21,75 | 43,5 | 19,5 | 39 | 78 | 37 |
| 3 | 19,75 | 59,25 | 15,75 | 37 | 111 | 33 |
| 4 | 18 | 72 | 12,75 | 35 | 140 | 29 |
| 5 | 16,5 | 82,5 | 10,5 | 33 | 165 | 25 |
| 6 | 15,25 | 91,5 | 9 | 31 | 186 | 21 |
| 7 | 14,25 | 99,75 | 8,25 | 29 | 203 | 17 |
| 8 | 13,5 | 108 | 8,25 | 27 | 216 | 13 |
| 9 | 13 | 117 | 9 | 25 | 225 | 9 |
| 10 | 12,75 | 127,5 | 10,5 | 23 | 230 | 5 |
| 11 | 12,75 | 140,25 | 12,75 | 21 | 231 | 1 |
| 12 | 13 | 156 | 16,25 | 19 | 228 | -3 |
| 13 | 13,5 | 175,5 | 19,5 | 17 | 221 | -7 |
| 14 | 14,25 | 199,5 | 24 | 15 | 210 | -11 |
| 15 | 15,25 | 228,25 | 29,25 | 13 | 195 | -15 |
| 16 | 16,5 | 264 | 36,75 | 11 | 176 | -19 |
| 17 | 18 | 306 | 42 | 9 | 153 | -23 |
Let us return once again to the concept of perfect competition and the equilibrium of the firm in these conditions. As is known, equilibrium occurs when MS = R, and the price under conditions of perfect competition coincides with marginal revenue, therefore, we can write: MS = M.R. = R. For a firm to achieve complete equilibrium, two conditions must be met:
1. Marginal revenue must equal marginal cost;
2. Price must equal average cost. And this means:
M.C. = M.R. = P = A.C. (5)
The behavior of a monopolist firm in the market will be determined in the same way by the dynamics of marginal revenue ( M.R. ) and marginal costs (MS). Why? Because each additional unit of production adds a certain amount to gross income and at the same time - to gross costs Kam. These certain quantities are marginal revenue and marginal cost. The company must compare these two values at all times. While the difference between MK And MS positive, the firm is expanding its production. We can draw the following analogy: just as a potential difference ensures the movement of electric current, so does a positive difference M.R. And MS ensures that the company expands its production volume. When M.R. = MS,“peace” comes, the balance of the company. But what price will be set under conditions of imperfect competition? What will be the average cost? (A WITH)? Will the formula be followed? MS = M.R. = R = AC?
Let's look at the table. 3. The monopolist, of course, strives to set high prices per unit of production. However, if he sets the price at $41, he will only sell one unit of the product, and his gross income will be only $41, and his profit (41 - 24) = $17. Profit is the difference between gross income and gross costs. Suppose that the monopolist gradually reduces the price and sets it at $35. Then, of course, he can sell more than 1 unit of goods, for example, 4 units, but this is also an insignificant sales volume. In this case, his gross income will be equal to $140 (35 x 4), and profit (140 - 72) = $68. Following the demand curve, the monopolist, by reducing the price, can increase sales. For example, at a price of $33, he will already sell 5 units. And although this will reduce the profit per unit of goods, the overall profit will increase. To what extent will the monopolist lower the price in an effort to increase its profits? Obviously, until the moment when the marginal income ( M.R.) will be equal to marginal cost (MS), in this case, when selling 9 units of goods.
Before analyzing the conditions for maximizing profit, let us first compare the demand curves for the goods of two firms - representatives of perfect and imperfect competition. From these graphs it is clear that a perfectly competitive firm (Fig. 3-a) can sell as much as it wants without affecting the market price. Therefore, the demand line DD for its output is horizontal. The inability to influence the market price is due to the relatively small volume of production of firms in the industry. Therefore, no matter how much a perfect competitor firm puts goods on the market, it will still his the quantity is too small to influence the prevailing market price.
In the case of an imperfect competitor firm (Fig. 3-b), the demand curve DD has a negative slope, since the greater its Q, the lower the price it can set. Therefore, when a monopolist firm releases a large quantity of a product onto the market, its price falls.
If the company does not have complete monopoly a reduction in P (i.e., price) of its competitor will shift the demand line DD to the left, to the position DiDi, as shown in Fig. Z-b. Consequently, due to the rival firm, even if the price decreases, it will now be possible to sell fewer goods, i.e. Qi The most important conclusion that can be drawn from examining the above graphs is the following: the horizontal nature of the demand line for a product produced by a firm characterizes the firm as a perfect competitor. If the demand line decreases, that is, has a negative slope, then we are dealing with a firm that is an imperfect competitor. Now, after analyzing the demand curve, we turn to the problem of profit maximization by a monopoly. This problem can be solved in two ways, or rather, with two analytical tools: 1) by comparing gross income (TR) and gross costs (TC); 2) the method of comparing marginal revenue (MR) and marginal costs (MC). As is known from Chap. 6, gross income is the product of PxQ, i.e., the unit price of the product multiplied by the number of units sold. Keeping in mind that to sell each additional unit of production the monopolist must lower the price, let us present in the form of a table the dynamics of price, gross income and marginal income (Table 2). The values of column 3 are obtained by multiplying the corresponding values of column 1 by the value of column 2. Column 4 is obtained from column 3 by subtracting the value preceding it from each subsequent value of gross income. For example, 78 - 41 = 37; 111 - 78 = 33; 140 - 111 =29, etc. Column 3 shows that gross income grows, despite the price decrease, up to the sale of 11 units of goods and reaches a maximum, i.e., $231. The monopolist reduces the price, but expands the volume of sales. But starting from the 12th unit of the product, when the price drops to $19 and below, gross income begins to decrease. Now the loss from low prices is no longer compensated by the gain from expanding sales - gross income is consistently declining. Graphically, the dynamics of gross income looks as shown in Fig. 4: The gross income curve of a firm with imperfect competition has a “hilly” appearance. The same graph also shows the curve of gross costs (TC), which are already known from Chapter. 6. The maximum total profit will be at the volume of output when the difference between TR and TC is maximum. This can be seen from the graph in Fig. 4: the maximum distance between TR and TC will correspond to the distance between points A and B, i.e. when 9 units are produced. products. There is no need to confuse maximum gross income and maximum total profit: when releasing 11 units. the largest volume of TR is achieved, but the maximum profit will be achieved at 9 units. products. Another way to determine maximum profit requires comparing marginal revenue and marginal cost. Let us recall once again that in conditions of perfect competition the price for an individual firm is a constant value and set by the market. But what is the marginal revenue? Marginal revenue is the additional revenue from selling an additional unit of a good. It is defined as the difference between TR n and TR n - i (see Table 2, column 4). If a firm is a perfect competitor, or “price taker,” then it will sell each additional unit of a good at the same constant price. For example, 1 unit. retails for $41, 2 units. at the same price will bring gross income of $82 (41x2). Marginal revenue (MR) for selling 2 units will be $82 - $41 = $41. If selling 3 units at a price of $41, gross revenue will be $123 (41x3), therefore, MR will again be $41. , since $123 - $82 = $41. Thus, we can conclude: under conditions of perfect competition, marginal revenue is equal to the price of the product, i.e. MR = P. What will MR be under imperfect competition? Let us graphically depict the dynamics of marginal income and demand in conditions of imperfect competition (on the y-axis - marginal income and price, on the x-axis - the quantity of production) (Fig. 5). The graph shows that the MR line decreases faster than the DD demand line. Under imperfect competition, marginal revenue is less than price. After all, in order to sell an additional unit of output, an imperfect competitor reduces the price. This decrease gives him some gain (Table 2 shows that gross income increases), but at the same time brings certain losses. What kind of losses are these? The fact is that, having sold, for example, the 3rd unit for $37, the manufacturer thereby reduced the price of each of the previous units of production (from 41 to 39 and from 39 to 37 dollars). Therefore, all buyers now pay a lower price, including those who would have bought the goods for both $41 and $39. The loss on the previous units would be $4 ($2 x 2). This loss is subtracted from the price of $37 to obtain the marginal revenue of $33. Let's look again at the firm's costs. It is known that average costs (AC) initially tend to decrease when the number of units of production increases. However, subsequently, when a certain level of production is reached and exceeded, average costs begin to rise. The dynamics of average costs, when depicted graphically, has the form of a U-shaped curve (see Chapter 6, §5). Using an abstract digital example, let us depict the dynamics of average, total (gross) and marginal costs of an imperfect competitor firm. But first, let us once again recall the following notation: TC = QxAC, i.e. gross costs are equal to the product of the quantity of goods and average costs; MC = TSp - TCn-i, i.e. marginal costs are equal to the difference between the gross costs of n units of goods and the gross costs of n-1 units of goods; TR = QxP, i.e. gross income is equal to the product of the quantity of goods and its price; MR = TRn - TRn-i, i.e. marginal income is equal to the difference between the gross income of n units of goods and the gross income of n-1 units of goods. Columns 2, 3, 4 (Table 3) characterize the production conditions of a monopolist firm, and columns 5,6,7 -
terms of sale. Let us once again turn to the concept of perfect competition and the equilibrium of the firm in these conditions. As is known, equilibrium occurs when MC = РхР, i.e. the price under conditions of perfect competition coincides with marginal revenue, therefore, we can write: MC = MR = P. Achieving complete equilibrium by a firm requires, as J. Robinson notes, the fulfillment two conditions: 1) marginal revenue must equal marginal cost; 2) price must equal average costs. And this means: MS = MR = P = AC. “Once again it should be noted that the concept of average costs also includes the normal level of profit (Robinson J. Economic theory of imperfect competition. M., 1986. pp. 142-143). The market behavior of a monopolist firm will also be determined by the dynamics of marginal revenue (MR) and marginal costs (MC). Why? Because each additional unit of production adds a certain amount to gross income and at the same time - to gross costs. These certain quantities are marginal revenue and marginal costs. The company must compare these two values at all times. As long as the difference between MR and MC is positive, the firm is expanding its production. The following analogy can be drawn: just as a potential difference ensures the movement of electric current, so a positive difference between MR and MC ensures the expansion of a company’s production. When MR = MC, peace and equilibrium of the company comes. But what price will be set under conditions of imperfect competition? What will be the average cost (AC)? Will the formula MC - MR = P = AC be observed? Let's look at the table. 3. The monopolist, of course, strives to set high prices per unit of production. However, if he sets the price at $41, he will sell only one unit of the product, and his gross income will be only $41, and profit (41 - 24) = $17. Profit is the difference between gross income and gross costs. Let's assume that the monopolist gradually reduces the price and sets it at $35. Then he will be able to sell, of course, more than 1 unit of goods - 4 units, but this is also an insignificant sales volume. In this case, his gross income will be equal to $140 (35x4), and profit (140 - 72) = $68. Following the demand curve, the monopolist, by reducing the price, can increase sales. For example, at a price of $33, he will already sell 5 units. And although this will reduce the profit per unit of goods, the overall profit will increase. To what extent will an imperfect competitor lower its price in an effort to increase its profits? Obviously, until the moment when marginal revenue (MR) is equal to marginal cost (MC), in this case, when selling 9 units of goods. It is at this point that the amount of profit will be maximum, i.e. (225 - 117) = 108 dollars. If the seller lowers the price below 25 dollars (i.e. below the price at which the maximum amount of profit is received - 108 dollars), for example , to 23 dollars, then the result will be as follows: having sold 10 units of goods, the seller would receive marginal income of 5 dollars, and marginal costs would be 10.5 dollars. Therefore, selling 10 units of goods at a price of 23 dollars would result in to a decrease in his profit (230-127.5) = 102.5. Under conditions of imperfect competition, the firm's equilibrium (i.e., the equality of marginal costs and marginal revenue, or MC = MR) is achieved at a volume of production where average costs do not reach their minimum. The price is higher than average costs. Under perfect competition, the equality MC = MR = P = AC is observed. With imperfect competition (MC = MR)< AC< Р. So, the maximum profit can be determined by comparing TR and TC at different volumes of output; the same result will be obtained if we compare MR and MS. In other words, the maximum difference between TR and TS (maximum profit) will be observed when MR and MC are equal. Both methods for determining maximum profit are equivalent and give the same result. In Fig. Figure 6 shows that the equilibrium position of the firm is determined by point E (the intersection point of MC and MR), from which we draw a vertical line to the demand curve DD. Thus, we will find out the price that provides the greatest profit. This price will be set at the level ei. The shaded rectangle shows what is called monopoly profit. Under perfect competition, a firm expands its production without reducing its selling price. Production increases until MC and MR are equal. An imperfect competitor is guided by the same rule - he compares additional costs and additional income when deciding to expand, suspend or reduce production, that is, he compares his MC and MR, and he expands production until MC and MR are equal. But the volume of production will be less than it would be under perfect competition, i.e. Qi< Q2. При совершенной конкуренции именно в точке Е2 происходит совпадение предельных издержек (МС), минимального значения средних издержек (АС) и уровня продажной цены (Р). Если бы цена (Рг) установилась на уровне точки Ег, то не было бы и монопольной прибыли. Другими словами, монопольная прибыль превышает нормальный уровень прибыли в условиях совершенной конкуренции. Setting a price at point E2 by a firm would obviously be altruistic. At this point MC = AC = P. But at the same time MOMR. A rationally operating company will by no means consider it normal for a situation where the expansion of production in the name of “public interests” will be accompanied by more additional costs than additional income. Society is interested in higher production volumes and lower costs per unit of output. If output were increased from Qi to Q2, average costs would decrease, but then to sell additional products it would be necessary to either reduce the price or increase sales promotion costs (and this is associated with an increase in sales costs). This path is not suitable for an imperfect competitor - he does not want to “spoil” his market by lowering prices. To maximize profits, the company creates a certain shortage, which determines the price exceeding marginal costs. The word “scarcity” in this case should not be understood as hiding goods under the counter in the conditions of “real socialism”. Scarcity means a limitation (less volume of supply) under conditions of imperfect competition compared to the volume that would be under conditions of perfect competition. This can also be seen from the graph: in Fig. 6 it is clear that Qi< Q2. Monopoly profit in the imperfect competition model is interpreted as a surplus over normal profit under conditions of perfect competition. Monopoly profit manifests itself as a violation of perfect competition, as a manifestation of a monopoly factor in the market. An important question: how sustainable is this excess over normal profit? Obviously, this will depend on the possibilities of the influx of new firms into the industry. Under perfect competition, additional profit (above normal) disappears relatively quickly under the influence of the influx of new firms. If the barriers to entry into the industry are high enough, then monopoly profits become sustainable. To measure the degree of monopoly power in economic theory, it is used Lerner index(A. Lerner, an English economist who proposed this indicator in 30s of XX century): L = --=--. The greater the gap between R and MC, the greater the degree of monopoly power. The value of L is in the range between 0 and 1. Under perfect competition, when P = MC, the Lerner index will naturally be equal to 0. Perfect competition presupposes the free flow of all factors of production from industry to industry. Therefore, in conditions of perfect competition, as emphasized by the neoclassical school, the tendency towards zero profit 1 * is clearly manifested. If there are obstacles to the free flow of resources, monopoly profit arises. Marginal Revenue- this is part of the profit received by the company from the sale of an additional unit of goods. This indicator is the main limit value and has a direct connection with profit and price. With imperfect competition, the value of marginal revenue reflects the additional revenue that the company receives at the time of selling additional products, the demand for which is rapidly declining. With imperfect competition, the market loses equilibrium. Under such conditions, the identity between marginal income and cost of production is violated. The imbalance is most pronounced under monopoly conditions. If a monopolist sells its own products, then it will need to increase the volume of production of goods by one unit while simultaneously reducing its cost. Considering that the cost decreases for each unit of output of the product, the total sales revenue will grow in parallel with the decreasing proportion. Marginal income under conditions of monopolization and imbalance has a number of distinctive features, namely: The marginal income indicator is directly related to the elasticity of demand - an unstable value that changes under the influence of a range of factors. Thus: Even with positive marginal revenue, it is necessary to analyze the company's marginal costs. Marginal costs indicate how much costs have changed as a result of an increase in sales volumes. This value is usually positive because each unit of a good requires certain costs to produce it. If the value of marginal revenue is greater than marginal cost, then the difference between these values is the company’s marginal profit. Stay up to date with all the important events of United Traders - subscribe to our In reality, it is almost impossible to find a situation where there would be one - the only producer of goods operating on the market, who does not have substitutes. And if so, then it is impossible to find a company whose demand curve for its products would be completely inelastic (Figure 2.1). Perfect competition and pure monopoly are theoretical abstractions that express two polar market situations, two logical limits. These models make it possible to formulate the conditions for the rational behavior of an individual firm seeking to maximize its profits in each of these situations. Figure 2.1. Perfectly inelastic demand and monopoly power over price In a pure monopoly, we are faced with a single seller of a product that has no close substitutes. A monopolist - a seller enters into market relations only with buyers of its products. The nature of this relationship is as follows: if the monopolist reduces the price, more goods will be bought from him. In perfect competition, a firm cannot influence its market price. A monopolist has some power over price. But the main thing is that the monopolist consciously seeks and sets a price level at which profit would be maximum. At the same time, the demand function
becomes given, i.e. it is assumed that the monopolist is unable to change it. Therefore, if a monopolist is able to consciously raise the price, then he is not yet able to establish the volume of demand. And if a monopolist has captured the entire market, then the demand curve for its products is the industry demand curve. Therefore, in order to sell additional quantity of products, it is necessary to reduce the price. Considering the model of pure competition, we compare, first of all, the demand curves for the goods of two firms - representatives of perfect and imperfect competition. Graphically, the demand curve of a competitive firm will look like a horizontal straight line, i.e. a competitive firm can sell as much as it wants without affecting the market price. The inability to influence the market price is due to the relatively small volume of production of firms in the industry. Therefore, no matter how much a company supplies goods to the market, this quantity is still too small to influence the prevailing price on the market. In the case of a firm that is an imperfect competitor, the demand curve D (Figure 2.2) has a negative slope, since the greater the quantity of goods that the firm intends to sell, the lower the price it will charge. Therefore, when a monopolist firm puts more of a product on the market, its price falls. Figure 2.2. Demand curve under the condition of a “pure” monopoly The most important conclusion that can be drawn from a comparison of the two curves is the following: the horizontal nature of the demand line for a product produced by a firm characterizes it as a perfect competitor. If the demand line has a negative slope, then we are dealing with a monopolist firm Profit is the difference between gross income and gross costs. There are two ways to solve this problem: Gross income is the product of the price of a unit of goods and the number of units of goods: TR=P·Q. Gross costs equal to the product of the quantity of goods and average costs: Graphically, the dynamics of gross income are shown in Fig. 2.3. the curve has a “hilly appearance”. The same graph also shows the total cost (TC) curve. The maximum total profit will be at the output level where the difference between TR and TC is maximum. In the figure, the maximum distance will correspond to the distance between points A and B. 2. Method for comparing marginal revenue (MR) and marginal cost (MC) Marginal cost are equal to the difference between the gross costs of n units of goods and the gross costs of n-1 units of goods: MC=TC n - TC n-1. Marginal Revenue is equal to the product of the quantity of a product and its price: Marginal Revenue
- This is additional income from the sale of an additional unit of goods. Under conditions of perfect competition, marginal revenue is equal to the price of the product, i.e. MR=P. Under imperfect competition, marginal revenue is less than price. M.R. The relationship between Figures 2.3 and 2.4 is as follows: after gross income reaches its maximum, marginal income becomes negative. In the case of a linear demand curve D, the MR graph intersects the x-axis exactly in the middle of the distance between zero and the quantity demanded at zero price. Let us return once again to the concept of perfect competition and the equilibrium of the firm in these conditions. As is known, equilibrium occurs when MC = P, and the price under conditions of perfect competition coincides with marginal revenue, therefore, we can write: MC = MR = P. For a firm to achieve complete equilibrium, two conditions must be met: MS=MR=P=AS The market behavior of a monopolist firm will also be determined by the dynamics of marginal revenue (MR) and marginal costs (MC). Because each additional unit of production adds a certain amount to gross income and at the same time - to gross costs. These are certain quantities - marginal revenue and marginal costs. The company must compare these two values at all times. As long as the difference between MR and MC is positive, the firm is expanding its production. When MR=MC, there comes “rest”, equilibrium of the company. But this is with perfect competition. What is it like for a monopolist? Profit is the difference between gross income and gross costs. Marginal revenue and marginal cost determine the slope of the gross revenue and gross cost curves at any point. Let's draw tangents to points A and B. Their equal slope means that MR=MC. it is in this case that the profit of the monopoly will be maximum. Under conditions of imperfect competition, the firm's equilibrium (i.e., the equality of marginal cost and marginal revenue, or MC = MR) is achieved at a volume of production where average costs reach their minimum. The price is higher than average costs. With perfect competition, the equality MC=MR=P=AC is achieved. with imperfect competition: (MC=MR) A monopolist seeking to maximize profit always operates on the elastic portion of the demand curve, since only when the price elasticity coefficient is greater than one (E d p > 1) is marginal revenue positive. In the elastic portion of the demand curve, a decrease in price provides the monopolist with an increase in gross income. And at E d p< 1, предельный доход отрицательный. So, the maximum profit can be determined by comparing TR and TC at different volumes of output; the same result will be obtained if we compare MR and MC. In other words, the maximum difference between TR and TC (maximum profit) will be observed when MR and MC are equal. Both methods for determining maximum profit are equivalent and give the same result. Figure 2.5 shows that the equilibrium position of the firm is determined by point E (the intersection point of MC and MR), from which a vertical line is drawn to the demand curve D. Thus, we find out the price that provides the greatest profit. This price will be set at level E 1. The shaded rectangle shows the amount of profit of the monopoly. Under perfect competition, a firm expands its production without reducing its selling price. Production increases until MC and MR are equal. The monopolist is guided by the same rule - he compares additional costs and additional income when deciding to expand, suspend or reduce production, i.e. compares his MC and MR. And he expands production until MC and MR are equal. But the volume of production will be less than it was under perfect competition, i.e. Q 1< Q 2 . При совершенной конкуренции именно в точке Е 2 , происходит совпадение предельных издержек (МС), минимального значения средних издержек (АС) и уровня продажной цены (Р). Если бы цена (Р 2) установилась на уровне точки Е 2, то не было бы монопольной прибыли. Другими словами, монопольная прибыль превышает нормальный уровень прибыли в условиях совершенной конкуренции. Setting a price by a firm at point E 2 would obviously be altruism. At this point MC=AC=P, but at the same time MC > MR. A rationally operating company will by no means consider such a proposal normal when the expansion of production in the name of “public interests” will be accompanied by greater additional costs for it than additional income. Society is interested in higher production volumes and lower costs per unit of output. If output increased from Q 1 to Q 2, average costs would decrease, but then in order to sell additional products it would be necessary to either reduce the price or increase sales promotion costs (and this is associated with an increase in sales costs). This path is not suitable for an imperfect competitor: he does not want to “spoil” his market by lowering prices. To maximize profits, the firm creates a certain shortage, which causes a price that exceeds marginal costs. Scarcity means a limitation (less volume of supply) under conditions of imperfect competition compared to the volume that would be under conditions of perfect competition. This is clear from the graph: Fig. 2.5 shows that Q 1< Q 2 . Monopoly profit in the imperfect competition model is interpreted as a surplus over normal profit under conditions of perfect competition. Monopoly profit manifests itself as a violation of perfect competition, as a manifestation of a monopoly factor in the market. How sustainable is this excess over normal profit? Obviously, much will depend on the possibility of new firms entering the industry. With perfect competition, profits above normal disappear relatively quickly under the influence of the influx of new firms. If the barriers to entry into an industry are high enough, then monopoly profits become sustainable. In the long run, any monopoly is open; therefore, over a long period of time, there is a tendency for monopoly profits to disappear as new producers enter the industry. Graphically, this means that the AC cost curve will only touch the demand curve. To measure the degree of monopoly power, the Lerner index is used L = (P - MC)/P, 0< L < 1 The greater the gap between P and MC, the greater the degree of monopoly power. Under perfect competition, when P=MC, the Lerner index will be zero. Perfect competition presupposes the free flow of all factors of production from industry to industry. Therefore, the tendency towards zero profit is clearly visible. If there are obstacles to the free flow of resources, free profit arises. Economic theory course: textbook - 4th updated and revised edition - Kirov, p.131 Let's compare the demand curves for goods of two firms - representatives of perfect and imperfect competition (Fig. 2.23). It is clear from the graphs that a perfectly competitive firm can sell as much as it wants without influencing the market price - the demand line /)/) for its products is horizontal (Fig. 2.23). The inability to influence the market price is due to the relatively small volume of production of firms in the industry. Consequently, no matter how much a perfect competitor firm supplies goods to the market, this quantity is too small to influence the prevailing price in the market. Rice. 2.23. Demand curves of firms of perfect (a) and imperfect (b) competitors In the case of a firm - an imperfect competitor, the demand curve 7) 7) has a negative slope, since the greater its 0, the lower the price it can set (Fig. 2.236). Therefore, when a monopolist firm releases a large quantity of a product onto the market, its price falls. If the firm does not have a complete monopoly, a reduction in the price of its competitor will shift the demand line 7)7) to the left - to position /) 1 /), (Fig. 2.236). Consequently, due to the rival firm, even if the price decreases, it will now be possible to sell fewer goods, i.e. 0, The conclusion that can be drawn from the graphs examined is the following: the horizontal nature of the demand line for a product produced by a company characterizes the company as a perfect competitor. If the demand line decreases, i.e. has a negative slope, then the firm is an imperfect competitor. The problem of profit maximization by a monopoly can be solved using two analytical tools: gross income comparison method 77? and gross vehicle costs using the marginal revenue comparison method L//? and marginal costs of MS. The gross income curve of a firm with imperfect competition has a “hilly” appearance (Fig. 2.24). The maximum total profit will be at such a volume of output when the difference between G/? And TS maximum. This is shown on the graph: the maximum distance between 77? And TS will correspond to the distance between points A and 7?, i.e. when 9 units of output have been produced. In this case, there is no need to mix the maximum gross income and the maximum total profit: with the release of 11 units, the largest volume of 77? is achieved, but the maximum profit will be achieved with 9 units of production. Rns. 2.24. Gross revenue and cost curves for a firm that is an imperfect competitor. Another way to determine maximum profit requires comparing marginal revenue and marginal cost. Marginal Revenue- this is additional income from the sale of an additional unit of goods, which is defined as the difference between TY„ And TY,^. If the firm is a perfect competitor, or “price taker,” then it will sell each additional unit of the good at the same constant price. Therefore, under conditions of perfect competition, marginal revenue is equal to the price of the product: MY = R. Let us graphically depict the dynamics of marginal income and demand under conditions of imperfect competition (Fig. 2.25). Rice. 2.25. Demand and marginal revenue curves for an imperfect competitor From the graph it is clear that the line MY decreases faster than the demand line 7)/). Under imperfect competition, marginal revenue is less than price: in order to sell an additional unit of output, an imperfect competitor reduces the price. Under conditions of imperfect competition, the equilibrium of the firm (equality of marginal costs and marginal revenue: MS = MY) is achieved at such a volume of production that average costs do not reach their minimum. At the same time, the price is higher than average costs. In perfect competition there is equality MS = MY = R = AC, with imperfect - MS = MY The maximum profit can be determined by comparing TY And TS at different production volumes; the same result will be obtained if you compare MY And MS. In other words, the maximum difference between TY and GS (maximum profit) will be observed with equality MY And MS. Both methods for determining maximum profit are equivalent and give the same result. Figure 2.26 shows that the equilibrium position of the firm is determined by the point E(intersection point MS And MY), from which a vertical line is drawn to the demand curve yay. This way you can find out the price that provides the greatest profit. This price will be set at E. The shaded rectangle shows the monopoly's profit. Monopoly profits exceed the normal level of profits under perfect competition. Rice. 2.26. The profit of a monopoly in the model of imperfect competition means a surplus over the normal profit under conditions of perfect competition. Monopoly profit manifests itself as a violation of perfect competition - a manifestation of the monopoly factor in the market. The excess above normal profits will depend on the possibilities of the influx of new firms into the industry. Under perfect competition, additional profit (above normal) disappears relatively quickly under the influence of the influx of new firms. If the barriers to entry into an industry are high enough, then monopoly profits become sustainable. To measure the degree of monopoly power in economic theory, the Lerner index is used: between R And MS, the greater the degree of monopoly power. Value /. lies between 0 and 1. Under perfect competition, when P = MS, The Lerner index will naturally be 0. Perfect competition presupposes the free flow of all factors of production from industry to industry. Therefore, in conditions of perfect competition, as emphasized by the neoclassical school, the tendency towards zero (normal) profit is clearly manifested. If there are obstacles to the free flow of resources, monopoly profit arises.
Specifics of marginal revenue under imperfect competition
Marginal revenue and production costs
The larger the gap
