Every entrepreneur seeks to maximize profits in all 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 generally accepted theoretical concept of income, it is common to refer to a certain set of benefits in monetary terms, which enterprises, households, or states receive from making certain transactions that are represented in a given work to a particular person. In other words, it can also be called the result of some kind of work done for the good. They are distinguished by several varieties:
- what we get on our hands is nominal income;
- what remains with us after the payment of assessed contributions is disposable;
- depending on how much different goods cost now that will be useful to us in life, we have a real income;
- the amount received by the company from its main activity is called gross income;
- 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 income.
What distinguishes monopoly from the competitive environment
We must understand that, depending on the conditions of the market environment, the level of profit and the policy of the enterprise’s behavior as a whole directly depend. Thus, the marginal revenue of a monopolist and a competitor manufacturer will differ significantly from each other. We draw attention to the figure below, in which the level of production is marked as a direct Q, and P is the cost line. The indices m and s indicate the conditions for the production of a monopolist and a competitor, respectively.
We see that the marginal income of the first is much to the left, which indicates the possibility of selling the smallest possible amount of goods at a more favorable cost. Thus, we can conclude: the less competition in the market, the more significant the cost of goods increases.
How to maximize profits in a competitive environment
In the conditions of perfect competition there is a huge number of such manufacturers who, realizing their goods, constitute only a small share of the supply market. Therefore, depending on the change in the volume of own capacities, the price of products will not change in any way. In such circumstances, marginal revenue, as well as the average, will be directly equal to the total price of the goods. Therefore, in order to maximize profits in the conditions of healthy perfect competition, it is necessary to conduct a quantitative analysis of the relationship between gross revenues and costs for 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 with a fixed amount of constant marginal costs is 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 the demand is often reinforced by certain consumer preferences for the appearance of the packaging, the quality of the goods and other characteristics. Much more often it is possible to meet, if not a perfect, but partial monopoly, the marginal income of which is achieved in several different ways. The behavior of a monopolist is somewhat different from how a participant in a competitive market is seeking its maximum profit.
Therefore, it is not for nothing that they are also called price seekers, since they are absolutely not tied to that, and using their own trial and error, they are looking for the optimal ratio of the quantity of goods produced and the cost at which you can get the maximum benefit and still remain necessary to the consumer.
Industry Equilibrium as a Market Model
It should also be noted that there is such a model of a competitive market in which a general equilibrium is reached, the marginal values of revenue in this case reach minimum but equal marks for the majority of manufacturers represented in the industry. This phenomenon has some features and consequences:
- each manufacturer implicitly carries out the equation of costs with price;
- at the same time, the profit of each industry representative is at zero.
A similar situation arises only when demand equals supply and is rather a theoretical model and a good example, but in practice it does not occur.
How to achieve optimal production
So, as we have already found out, the manufacturer must increase its own production as long as the level of marginal revenue exceeds the total costs.
And only when the last value begins to dominate over revenues, it is necessary to dwell on the optimal volume of production, which will bring the maximum revenue. But do not flatter yourself and think that the most acceptable production will bring the highest incomes. In order to calculate the best combination of correspondence between costs and profits, it is necessary that the realization of the enterprise meets the following condition: the firm is profitable if the market price of the total production is higher than the total costs.