The firm achieves maximum profit at the level of production at which marginal revenue (MR) equals marginal cost (MC). Dependence of the total costs of the enterprise on production volume. The larger the production volume is smaller.

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

Estimation of production volume

OP is assessed using the following:

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

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

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

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

OP is determined using:

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

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

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

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Three indicators are used to measure production volumes:

Aggregate (total, total, gross) product (TP) is the volume of production obtained using one variable factor (resource) with others remaining constant.

Expressed in physical (natural) units.

Average product (AP) - output per unit of variable factor. The average product characterizes the average productivity of the resource:

where AP l is the average product (average productivity) of labor;

L is the amount of labor invested;

TP is the total production volume.

Marginal product (MP) is the increase in the total volume of product as a result of the use of an additional unit of a given variable resource. The marginal product characterizes the marginal productivity of a resource:

If the investment of a resource (labor) changes by one, then the marginal product can be calculated as the difference between the given and previous production volumes:

The marginal product of a factor of production serves as the basis for determining the remuneration of factors of production (return on an input factor).

The relationship between the volume of production and the change in the input variable factor is described using the corresponding curves.

Let's consider how the firm's production volume changes when a variable factor changes. Let us assume that production is carried out using fixed (capital) and variable (labor) factors. The production results are presented in table. 13.2.

Table 13.2

Total, average and marginal product of labor

By putting labor costs on the horizontal axis and output volume on the vertical axis, we can construct curves of total, average and marginal products that characterize the relationship between the costs of a variable factor and the corresponding indicator of output volume (Fig. 13.3).

Rice. 13.3. Curves of total, average and marginal product of labor: a) total product curve; b) curve of average (AP) and marginal (MP) product

As can be seen from the graphs, the total product first increases at a high rate, as the marginal product also grows (each additional worker adds a larger and larger value to the total production volume), then, as the marginal product decreases, the total product continues to grow, but at a slower pace, it reaches its maximum when marginal product is 0, and then when marginal product becomes negative, total product begins to contract.

The marginal and average products first increase and then, after a certain point, begin to fall. This dynamics of production volume indicators is explained by the action of the law of diminishing returns, according to which, starting from a certain point, with an increase in a variable resource by one unit, the marginal product per each subsequent unit of a variable resource decreases.

The joint dynamics of the marginal and average products shows that at first the marginal product grows faster than the average, since each new worker adds to the total product an amount greater than the average product. Then the value of the marginal product begins to decrease, and accordingly, the average product begins to fall.

As long as the marginal product (MP) curve is above the average product (AP) curve, average product rises; when the marginal product (MP) curve is below the average product (AP) curve, average product falls.

Average product reaches its maximum at the intersection point of the average product (AP) and marginal product (MP) curves.

Self-test questions

1. What indicators measure the production volume of an individual company?

2. How are average and marginal products calculated? What do they characterize?

3. What does the dynamics of total, average and marginal products depend on?

4. What do the marginal and average product curves characterize and how do they relate?

5. When does average product reach its maximum?

Basic concepts and terms

Production function, isoquant, marginal rate of technological substitution, isoquant map, total product, average product, marginal product, total, average, marginal product curves.

1. The relationship between the volume of output and the amount of resources expended is described by the production function. Isoquant is a curve showing all possible combinations of resources that can be used to produce a given volume of output. The marginal rate of technological substitution is the amount of one factor that can replace a unit of another factor, provided output remains unchanged. A set of isoquants characterizing different production volumes resulting from any combination of production factors forms an isoquant map.

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

Production costs: concept, essence, meaning

The production process from an economic and organizational point of view is a rather complex and multifaceted process that requires sufficient effort and labor from the enterprise. Any production is an expense or they are also called costs.

Definition 1

Production costs are the expenses that, one way or another, an enterprise incurs in the manufacture (production) of a product that is subsequently sold on the market.

But here it must be said that there are still small changes, since, for example, payments for housing and communal services, if there is no production, will be less during these periods of time, since there are less costs for electricity or water, wages may also be less, depending on the type of equipment used payment systems at the enterprise (if there is piecework payment, then the costs for the enterprise are lower).

If we talk about variable costs, they directly depend on the volume of production; the more products produced, the higher the variable costs. For example, to produce 100 units of products it is necessary to purchase raw materials for 50,000 rubles, and for 200 units 100,000 rubles.

For the conditions of pure (perfect) competition, this law has a very important consequence.

Since under the conditions of this competition MR = P and MR = MC, then at the point of maximum profit MC = P.

The law and its corollary can be illustrated in Fig. 2

The graph in Fig. 2

Before the firm reaches maximum profit (point E) MC

marginal revenue (MR) is greater than marginal cost

After passing point E, the limit P MR

revenue is less than marginal cost

The law of profit maximization applies

not only in conditions of pure competition

but also in any other market structure

(monopoly, oligopoly, monopolistic Q

competition).

Despite the fact that with imperfect competition

marginal revenue (MR) is always less than price (P), the condition for maximizing profit MR=MC is nevertheless preserved.

In the long run, the firm seeks to increase production by increasing all factors. There is an effect of increasing scale of production.

This effect can be positive, constant, or negative when output grows faster, the same, or slower, respectively, than resource inputs.

One or another type of scale effect determines the minimum efficient size of an enterprise. The minimum efficient size of an enterprise is the size at which the volume of production allows minimizing average costs. Different industries have different minimum efficient plant sizes. Therefore, in the economy, along with large enterprises, there are many small firms operating.

The positive effect of increasing the scale of production - is to reduce average costs with increasing scale of production. It depends on a number of factors.

A certain impact on the dynamics of average costs is exerted by the advantages of the division and specialization of labor that have not yet been used by the company, the possibility of improving methods of organizing production, and temporary savings on costs associated with the maintenance of the managerial apparatus.

The effect of scale growth is most pronounced in large firms, where, in addition to the already mentioned reserves for increasing labor productivity and reducing average costs, new ones are added. In particular, the opportunity to purchase and effectively use expensive and high-performance equipment, advantages when purchasing raw materials and selling goods in large quantities, advantages when obtaining bank loans, etc.

Test questions and assignments.

1. How does a firm differ from an enterprise?

2.What is the difference between an entrepreneur without the formation of a legal entity (PBOYUL) and a company with the status of a legal entity?

3. How does a partnership differ from a society?

4.What is the difference between a general and limited partnership?

5.Name the main advantages and disadvantages of LLCs and JSCs

6.What do a general business partnership and a cooperative have in common?

7. How does a state-owned enterprise differ from a unitary enterprise based on the right of full economic management?

8. What is “capital” in the “broad” sense of the word?

9. How do accounting costs differ from economic costs?

10.Why is normal profit included in economic costs?

11.What do the terms “fixed” and “variable” costs mean?

12.Which costs have a parabolic shape on the graph?

13. At what volume of production does the firm receive maximum profit?

1.. An open joint-stock company (OJSC) differs from a limited liability company (LLC) in that:

a) an OJSC can only include persons working at a given enterprise, but an LLC cannot;

b) an OJSC is characterized by unlimited liability of its participants for its debts, while an LLC has limited liability of its participants;

c) OJSC has the right to issue shares, but LLC does not;

d) there is double taxation in an LLC, but not in an OJSC.

2. Find the incorrect characteristics of a business partnership (HP) from the following:

a) HT is an association of individuals;

b) HT is a legal entity;

c) the liability of persons included in the partnership is always unlimited;

d) HT may also include legal entities.

3. Three participants of the company are liable for its obligations with all the property belonging to them; for the other five, the risk of loss is limited to the amount of their contributions. The company is:

a) a business limited liability company;

b) a limited partnership;

c) a full business partnership;

d) a business company with additional liability.

4. Which of the following is characteristic only of a corporation:

a) involvement of hired managers in management;

b) division of profits between the owners of the company;

c) payment of dividends;

d) use of hired labor.

5..The difference between total revenue and external costs is:

a) accounting profit;

b) economic profit;

c) normal profit;

d) real profit.

6. In the short-term period of the company’s activities, all costs are:

a) alternative;

b) constant and variable;

c) implicit;

d) obvious.

7. Total costs at zero production volume are equal to:

a) fixed costs:

b) economic costs;

c) wages;

d) costs of raw materials.

8.What is the main factor underlying the classification of costs into fixed and variable:

a) labor costs;

b) quantity of products produced;

c) costs of paying for raw materials;

d) costs associated with the use of buildings and structures.

9 Which of the following formulas is correct:

a) accounting profit = total income – opportunity costs;

b) economic profit = total income - explicit costs;

c) normal profit = total income - implicit costs;

d) profit = total revenue – total costs.

10.Marginal revenue is:

a) the amount of cash receipts received by a company from the sale of a certain amount of goods:

b) receipts per unit of good sold;

c) the increase in revenue that arises from the sale of the next unit of production,

d) the difference between total revenue and total costs for a certain period of time.

11. The condition for maximizing profit is:

a) equality of marginal revenue to marginal costs;

b) the totality of the firm’s fixed and variable costs in connection with the production of products in the short term;

c) an increase in total costs caused by an increase in production by one more unit;

d) an increase in revenue that arises from the sale of another unit of production.

True False.

1. The total costs associated with production grow in direct proportion to the size of the product produced by the firm.
2. The value of total fixed costs will not change if, within the short-term period, output increases or decreases.
3. Marginal costs can be measured as the ratio of the increase in total variable costs to a unit increase in the output of a given enterprise.
4. The minimum efficient size of an enterprise is the size at which the volume of production allows minimizing the sum of total fixed and variable costs.
5. Economic profit is the difference between total revenue from sales of products and the sum of accounting costs and accounting profit.
6. The larger the firm's production volume, the lower its fixed costs.
7. For firms operating in perfect competition, the price of the product equals marginal revenue.
8. Which of the following curves never takes a U-shape:

a) AVC; b) MS; c) AFC; d) ATS

Basic concepts and terms.

Individual entrepreneurship(without forming a legal entity) - a business owned by one person who bears unlimited liability (i.e., with all his property) for his debts.

Unitary enterprise.- a commercial organization not vested with the right of ownership of the property assigned to it. It is created only as a state or municipal one.

External (explicit, accounting) costs – the cost of expended resources, estimated at the current prices of their acquisition.

Implicit costs– opportunity costs of using resources owned by the owners of the company.

Economic costs- costs equal to the amount of income that can be obtained with the most profitable of all alternative ways of using the resources expended.

.Fixed costs– costs, the value of which does not depend on the volume of products produced.

Variable costs– costs, the value of which varies depending on changes in production volume.

Average total costs– total costs per unit of production

Marginal cost– additional costs associated with increasing production per unit of output.

Short term– a period during which the volume of use of certain factors of production does not change.

Positive economies of scale– reduction of average costs as production volumes increase.

Bibliography.

1. Guseva T.A. Business law: Textbook. Benefit. – M.: Publishing house RIOR, 2005. -80 p.
2. Introduction to market economics: Textbook. allowance for economics specialist. universities /A.Ya.Lifshits, I.N. Nikulin and others. Edited by A.Ya.Lifshits, I.N. Nikulina. M., 1994.
3. Kamaev V.D. and others. Textbook on the basics of economic theory (economics). M., 1994.
4. Course of economic theory / Ed. ed. prof. M.N. Chepurina, prof. E.A. Kiseleva. Kirov, 1994.
5. Organizational and legal forms of commercial activity in Russia (commentary to the Civil Code of the Russian Federation). – M., 1995.
6. Fundamentals of economic theory: Textbook for grades 10-11. general images. establishment with in-depth study of economics / State. Univ. High School of Economics; Ed. S.I. Ivanova. - In 2 books. Book 1.- M.: Vita-Press, 1999.336 p.

Related information.

Company performance results

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

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

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

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

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

MS = M.R. = R.

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

Quantity of products, units

Rice. 7.9. Profit maximization rule

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

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

losses, since its costs will be greater than its income

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

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

conclusions

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

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

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

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

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