Every entrepreneur strives to obtain maximum profit under any market conditions - be it perfect competition or absolute monopoly. How to achieve this indicator, and what conditions should be followed, we will consider in the article below.
Classification and the role of income
In the conventional theoretical concept of income, it is inherent to call a certain set of benefits in monetary terms, which enterprises, households or states receive from certain transactions represented in the work provided to a particular person. In other words, it can also be called the result of some work done for good. They are divided into several varieties:
- what we get in our hands is a nominal income;
- what we have left after payment of mandatory contributions is available;
- depending on how many different goods are now in use, which will be useful to us in life, we have a real income;
- the amount received by the enterprise from its main activity is called gross income;
- the weighted average revenue from services rendered or goods sold is called average income;
- the additional amount of money that an entrepreneur receives from increasing production is the marginal revenue.
The difference between a monopoly and a competitive environment
We must understand that, depending on the conditions of the market environment, the level of profit and the policy of the behavior of the enterprise as a whole directly depends. So, the marginal revenue of a monopolist and a competitor producer will differ significantly from each other. Let's pay attention to the figure below, on which the level of production is marked as the direct Q, and P is the line of costs. The conditions for the production of a monopolist and a competitor, respectively, are indicated by the indices m and c.
We see that the marginal income of the former is much to the left, which indicates the possibility of realizing the smallest possible volume of goods at a more favorable price. Thus, we can conclude: the less competition in the market, the more important the value of the commodity is growing.
How to maximize profits in a competitive environment
In the conditions of perfect competition, there is a huge number of such producers, who, realizing their goods, constitute only a small part of the supply market. Therefore, depending on the change in the volume of its own capacities, the price of the products will not change in any way. In such conditions, marginal revenue, just like the average, will be directly equal to the aggregate price of the commodity. Therefore, in order to maximize profits in conditions of healthy perfect competition, it is necessary to carry out a quantitative analysis of the relationship between gross revenue and costs at different volumes of output. This does not always mean that the mass of production will be maximum, no.
On the contrary, the entrepreneur must reduce the output of his products until the gross profit for a fixed volume of fixed marginal costs, will not be at its maximum.
Monopoly and profit maximization
It should be understood that the model of a perfect competitive market is, rather, an idealized description of the relationship between supply and demand, which in reality does not exist. Since the supply side always has the right connections, informants about other manufacturers and much more, while demand is often supported by certain preferences of consumers to the appearance of the package, the quality of the goods and other characteristics. Much more often it is possible to meet even if not a perfect, but a partial monopoly, the marginal revenue of which is achieved in several other ways. The behavior of a monopolist is somewhat different from how a participant of a competitive market is looking for its maximum profit.
Therefore, they are also called price searchers, because they are not tied to it at all and by their own trial and error they are looking for the optimal ratio of the quantity of goods produced and the cost at which it is possible to get the maximum benefit and still remain necessary to the consumer.
Sectoral equilibrium as a model of the market
It should also be noted that there is such a model of a competitive market in which a general equilibrium is achieved, the revenue limits in this case reach a minimum, but equal, levels for the majority of manufacturers represented in the industry. This phenomenon has some peculiarities and consequences:
- each manufacturer unquestionably carries out the equation of costs with the price;
- while the profit for each representative of the industry is at the zero mark.
Such a situation arises only when demand is equated with supply and is a rather theoretical model and a successful example, but in practice it does not occur.
How to achieve the optimal production volume
So, as we have already explained, the manufacturer must increase his own production until the level of marginal revenue exceeds the total costs.
And only when the last figure begins to dominate the revenue, it is necessary to stop at the optimal volume of production, which will bring the maximum revenue. But do not delude yourself and think that the most permissible output will bring the highest incomes. In order to calculate the best combination of the correspondence between costs and profits, it is necessary that the realization of the enterprise correspond to the following condition: the firm is profitable if the market price of aggregate output is higher than the total amount of costs.