Rules for maximizing profits. Conditions for maximizing profit

Profit is for any entrepreneur the purpose, taking into account which the efficiency of economic activity is measured. Producers intend to maximize the financial result, which depends on many factors: costs, output, the amount of resources and their combination. The paramount task of the economist at the enterprise is to find the volume at which the financial results will be satisfactory. To do this, you must follow the rules of maximizing profits, which are based on the ratio of marginal revenue and costs.

Revenue and profit

Financial resources that remain at the disposal of the enterprise after retaining economic costs from revenue are equated to profits. The price of the product and the amount directly affect the volume of total revenue or gross income (TR). That is, the profit (P) of the enterprise is the difference between TP and TS, where TS - gross (total) costs.

Comparing the gross indicators of income and costs, we obtain different amounts of profit:

• Provided that TP> TC, the profit is higher than 0;
• If, on the contrary, TP
• If ТР = ТС, then П = 0 (this is the state when the firm does not receive profit, but also does not bear losses).

By carrying out the production of goods (goods, services), the economic entity seeks to increase profits. Profit maximization is the definition of the optimal volume of production of these goods.

Determination of the optimal volume

There are 2 approaches to identifying the quantity of products / services, in which the activity of an economic entity will be effective. Conditions for maximizing profits:

1. To produce products in such a volume, at which the difference between the TP and TC indicators reaches a maximum value.
2. When comparing the marginal magnitudes of income (MR) and costs (MS), their equality must be satisfied.

To understand the second condition, it is necessary to restore in memory or study the definitions of marginal costs and income.

Marginal Income and Costs

Marginal revenue is an additional (additional) result of the enterprise's activity from the sale of each subsequent unit of goods. The value of MR is determined by the ratio of gross receipts (ΔTP) to the additional released unit of goods - goods / services (ΔB).

Limit costs determine how much more resources will need to be spent to produce an additional unit of output.

That is, each subsequent unit of goods, the marginal cost of which is less than the marginal revenue, must be produced, since from each such sold unit the enterprise will receive more income than it spends resources. Once MP = MS, you should stop the increase in volume, because with this equality the highest profit of the firm is achieved. The conditions for maximizing profit have been achieved.

Minimization of losses

The previously discussed conditions for profit maximization, which are fulfilled when the optimal volume of production is achieved, yield one result. That is, if for the same firm to determine the optimal output volume, then using the first or second condition will achieve the same amount of volume.

If an economic loss is discovered, the producer must also determine the volume of production at which the losses will be the least. This is possible provided that the difference between gross costs and revenue will be minimal.

Minimization of losses of a firm is achieved when the price of the last unit of output volume is equal to the marginal cost. But the price should not exceed the average gross costs (ATS) and should be above the average variable costs (ABC). With perfect competition, when the manufacturer is unable to influence the value of the goods, MR (marginal revenue) is equivalent to the price (P) of the unit of output. Then MP = MS = P, if ABC

Market price and average costs

So, for the rule of maximizing profits in conditions of perfect competition, the equality MP = MS = P is characteristic. In the equation, a price appears, which must be compared with the costs for extracting economic profit.

Average costs (AC) are defined as a private gross expenditure and production volume. They come in three types:

• ATS - gross;
• ABC - variables;
• APS are permanent.

Value for money:

1. P> ATS - the case in which the economic profit of the firm is achieved. The conditions for maximizing profits are such that incomes are higher than costs.
2. P = automatic telephone exchange. The enterprise covers its expenses without receiving financial benefits.
3. P
4. ABC

Profit in conditions of imperfect competition

In the market situation, when producers can control prices, demand decreases, and then the rules for maximizing profits change. The manufacturer poses the question: to reduce the price or reduce the volume of output.

But with imperfect competition, the greater the sales volume, the lower the price of the product, and each additional unit of production is sold at a low price. That is, to sell an additional unit, the manufacturer reduces the price. On the one hand, the effect of increasing sales is created, on the other hand, the company bears losses, as buyers pay less.

The relative loss reduces marginal revenue (MR), which does not coincide with the sale price. The ways of maximizing profits with perfect and, conversely, imperfect competition have a general condition: MP = MS. But in each case there are specific features that can be considered when studying the types of market imperfect competition.

Profit under monopoly

The market in which one producer sells a product that does not have similar samples with a similar set of characteristics is called a monopoly. Absence of competitors is the main condition of monopoly. In practice, especially at the global and national level, such a market model is rare, but takes place at the local level.

The uniqueness of the product is forced to force the buyer to purchase it at a price set by the manufacturer, or to refuse it altogether. But if the price is overstated, then the purchasing power will be reduced. Therefore, the monopolist's goal for profit maximization is not only the determination of volume, but also the establishment of that price for the product, in which all the products produced by the enterprise will be realized.

To obtain high profitability, the following condition is mandatory: P> MP = MS. First, according to the known equality MP = MS, the firm-monopolist establishes the optimal volume of output of the good, and then, comparing the marginal revenue with the price, establishes its value by the equation P> MR.

Profit with oligopoly

A small number of large firms, competing with each other, is characteristic of oligopoly. The close interrelation of firms affects their behavior when setting prices. The strategy of competitors is a fundamental factor in determining the price of the good and the volume of output.

With this type of market structure, the equality MP = MS, at which the optimal volume is located and high profit is achieved, does not work. Maximization of profit under oligopoly:

• Product differentiation;
• Improvement of quality;
• Unique design;
• Improvement of the level of service.

Long-term period

Maximization of profit in the short term is presented in the above examples. For the long-term period there are specific features of increasing profits:

• Time factor;
• Probability of occurrence of new firms or, conversely, their reduction;
• Price change.

The situation when the cost of goods above the average gross costs (ATC), contributes to attracting new competitors in the industry. However, a sharp increase in firms leads to an increase in the volume of goods on the market, and this is a direct way to reduce the price, which falls to the level of automatic telephone exchange. The fear of incurring losses leads to an outflow of firms from the industry, and a reverse trend is developing.

The reduction in prices leads to a flattening of gross income to the level of gross costs, the amount of net profit decreases, but the accounting profit remains stable. This allows firms to continue operating in the long-term without changing production, to increase demand, which will pull the price rise and create conditions for maximizing profits: P> ATS.

In an industry that is characterized by the presence of rising costs, another situation: it simply frightens off new firms to go out with their products to this market if the price is unprofitable. If a price is established that exceeds the average gross expenses and ensures a stable demand, there are all possibilities for implementing the rule of maximizing profits.