29. Cross elasticity demand by price.
The cross price elasticity of demand characterizes the relative change in demand for one good (for example, X) depending on the change in the price of another good (for example, Y). The coefficient of cross-elasticity of demand is calculated by the formula
E xy = (percentage change in the volume of demand for good X) / (percentage change in price for good Y) = (∆Q x / ∆P y) * (P y / Q x).
The cross-elasticity coefficient of demand can be positive, negative or zero.
Fungible goods have E xy> 0, since an increase in the price of good Y will cause an increase in demand for good X, since X replaces Y. For example, as the price of coal rises, the demand for liquid fuel or firewood increases. The higher the cross-elasticity coefficient, the more degree interchangeability of two goods.
Complementary goods have E xy< О. Например, с повышением цены на автомобили спрос на бензин уменьшится. Чем больше отрицательная величина коэффициента перекрестной эластичности, тем больше степень взаимодополняемости товаров.
Independent products have E xy = 0. In this case, a change in the price of one product does not in any way affect the demand for another. For example, with an increase in the price of bread, the demand for cement will not change.
It should also be borne in mind that the cross-elasticity of demand can be asymmetric. It is obvious, for example, that if the price of meat decreases, then the demand for ketchup will increase; however, if the price of ketchup increases, this is unlikely to change the demand for meat.
The calculation and analysis of the cross elasticity coefficients allow us to establish the belonging of the product to a certain type; interchangeable or complementary. In addition, the calculation of the cross-elasticity coefficient is also used to prove that a firm does not monopolize the production of any product: with a positive cross-elasticity coefficient E xy, in the event of an increase in the price of the company's products, the demand for interchangeable products of another firm increases.
30. Income elasticity of demand.
Income elasticity of demand This coefficient shows how many percent the demand for products will change when the buyer's income changes by 1%, and is calculated by the formula:
where 
– average value the volume of demand for the product; 
Is the average consumer income; Δ I- change in income equal to I 2
–
I 1 ;I 1 - the initial amount of income; I 2 - the final amount of income.
Differences. multiple formselastic demand by income :
1.
Positive(
> 0) related to normal goods (high quality goods). With the growth of income, the demand for such goods also increases.
2.
Negative(
<
0), относящаяся к товарам низшего качества.
При увеличении доходов, спрос на такой
товар падает.
3.
Zero(
= 0), at which the volume of demand is insensitive to changes in income.
In practice, the value of the coefficient of income elasticity of demand is as follows. With its help, the prospects for the development of industries are predicted: developing, stable, or stagnant, and dying. The higher the relative income elasticity of demand in an industry, the more actively this industry develops. The growth of the positive value of the coefficient E i at a rate approximately the same as the rate of production growth indicates stability in the industry, and the lack of growth indicates stagnation. Finally, a negative ratio is a sign of declining production. Using the coefficient of the income elasticity of demand to classify enterprises, their groups or industries, depending on development trends, makes it possible to timely identify critical areas and carry out their reorganization.
DEMAND- the solvent need of buyers for this product at a given price. Demand is characterized bydemand- the amount of goods that buyers are willing to purchase at a given price. The word “ready” means that they have a desire (need) and an opportunity (availability of necessary Money) to purchase goods in a given quantity.
It should be noted that demand is a potential solvent need. Its value indicates that buyers are ready to purchase such a quantity of goods. But this does not mean that transactions in such volumes will actually take place - it depends on a number of economic factors. For example, manufacturers may not be able to produce that amount of a product.
Can be seen asindividualdemand (demand of a specific buyer), andtotal valuedemand (demand of all buyers present in the market). In economics, it is mainly the total value of demand that is studied, since individual demand strongly depends on the personal preferences of the buyer and, as a rule, does not reflect the real picture in the market. So, a specific buyer may not feel the need for any product (for example, a bicycle) at all, nevertheless, there is a demand for this product in the market as a whole.
Typically, the demand for a product is subject tothe law of demand.
DEMAND CROSS-PRICE SCHEDULE- a graph showing the dependence of the value of demand for one product on the price of another product. Each value of the price for one corresponds to its own value of the value of the demand for another. This dependence can be expressed graphically in the formcross demand curveon the cross-plot of demand versus price.
Note that although the abscissa is usually the independent variable, on the cross-plot of demand versus price, on the contrary, it is customary to plot the price of the influencing good on the abscissa ( P A ), and the ordinate is the quantity of the dependent product ( Q B ).
CROSS DEMAND CURVE- a continuous line on the graph of the cross-dependence of demand on the price, on which each value of the price of the goods A corresponds to a certain amount of demand for the product B .
CROSS-PRICE ELASTICITY OF DEMAND(cross price elasticity of demand) - the degree of change in the value of demand for a good when the price of any other good changes.
It is important to note that cross-elasticity is direct in nature and does not mean that there is an equal inverse relationship... For example, lower prices for overseas tourist trips will significantly increase the demand for travel guides. However, the opposite is not true: reducing the price of travel guides will not significantly increase the demand for travel abroad.
Cross price elasticity demand is characterized bycoefficient of cross-price elasticity of demand.
COEFFICIENT OF DEMAND CROSS ELASTICITY AT PRICE- a numerical indicator reflecting the degree of change in the value of demand for a product or service in response to changes in the price of some other product (service). Calculated by the formula:
where P a - product price a ,
Δ
P a - change in the price of goods a ,
Q b - the amount of demand (quantity of goods) for the product b ,
Δ
Q b - change in demand for goods b .
Depending on the value of the coefficient E ab allocate:
- lack of cross elasticity ( E ab = 0 )
- direct cross elasticity ( E ab > 0 )
- reverse cross elasticity ( E ab < 0 )
Products for which a change in the price of one product leads to a noticeable change in demand for another product are collectively calledrelated goods... Products for which the cross-elasticity value is equal to or close to zero are calledneutral goods.
The coefficient of elasticity gives an idea of how the sales proceeds will change when the price of a product changes.
RELATED PRODUCTS- goods for which a change in the price of one good leads to a noticeable change in demand for another good. The main groups of related goods aresubstitute goods and complementary goods.
SUBSTITUTE PRODUCTS(substitutes) - a group of goods and services for which an increase in the price of one of them leads to a noticeable increase in demand for others acting as substitutes, complete or partial. This is because an increase in the price of one of these products attracts buyers to cheaper substitutes and vice versa.
Substitute products have direct cross elasticity, the magnitude of which depends on how close the substitute products are. For example, chicken and turkey meat are closer substitutes than chicken and beef, so the cross-elasticity coefficient for them will be higher.
SUPPLEMENTARY PRODUCTS(complementary goods) - goods that satisfy the needs only in combination with each other, for example, cars and fuel and lubricants, mobile phones and services of cellular operators, etc. For such goods, an increase in the price of one of them leads to a noticeable decrease in demand for others.
Substitute goods have inverse cross elasticity, the magnitude of which depends on how closely interrelated the goods are, how much one good is needed to use another. For example, mobile phone cannot be used without the services of cellular companies - these products are very closely related. Mobile phone is less connected with accessories for it. The absolute value of the cross-elasticity coefficient in the first case will be higher.
NEUTRAL GOODS- goods for which a change in the price of one good does not cause a noticeable demand for another. The cross-elasticity coefficient for them is equal to or close to zero.
However, complete absence dependencies can be observed only for those goods, the share of which is insignificant in the structure of buyers' expenses. If the share of spending on the product is high, then the price change will affect the amount of disposable income and thus the demand. Here, in turn, two cases can be distinguished. If it comes on the costs of goods and services of prime importance, the price of them will inversely affect the amount of funds available. For example, if the rent and prices for utilities, then consumers will have less money for other expenses, and therefore the demand for whole line goods will decline. If we are talking about luxury goods, such as jewelry, then the rise in prices for them will make them inaccessible to many families. As a result, the money they intended to use to buy jewelry they would prefer to use for something else. In this case, you can see a small direct relationship.
Price elasticity of demand
Price elasticity of demand shows the percentage change in the value of demand when the price changes by 1%. The following factors influence the price elasticity of demand:
§ Availability of competing products or substitute products (the more there are, the greater the opportunity to find a replacement for the more expensive product, that is, the higher the elasticity);
§ A change in the price level imperceptible for the buyer;
§ Conservatism of buyers' tastes;
§ The time factor (the more time a consumer has for choosing a product and thinking it over, the higher the elasticity);
§ Specific gravity goods in consumer spending (the greater the share of the price of goods in consumer spending, the higher the elasticity).
Cross-sectional elasticity of demand
(cross elasticity of demand)
It is the ratio of the percentage change in demand for one good to the percentage change in the price of some other good. A positive value of the value means that these goods are interchangeable (substitutes), a negative value indicates that they are complementary (complements).
where the superscript means that this is the elasticity of demand, and the subscript means that it is the cross-elasticity of demand, where and means some two goods. That is, the cross-elasticity of demand shows the degree of change in demand for one good () in response to a change in the price of another good (). Depending on the values of the receiving variable, I distinguish the following relationships between goods and:
28)))Elasticity of supply, factors that determine it
The elasticity of supply is an indicator that reproduces the changes in the aggregate supply that occur in connection with the rise in prices. In the case when the increase in supply exceeds the increase in prices, the latter is characterized as elastic (the elasticity of supply is greater than one - E> 1). If the increase in supply is equal to the increase in prices, the supply is called a unit supply, and the elasticity indicator is equal to one(E = 1). When the increase in supply is less than the increase in prices, the so-called inelastic supply is formed (the elasticity of supply is less than one - E<1). Таким образом, эластичность предложения характеризует чувствительность (реакция) предложения товаров на изменения их цен.
The elasticity of the supply is calculated through the coefficient of elasticity of the supply by the formula:
- K m - coefficient of elasticity of supply
- G - percentage of change in the quantity of the offered product
- F - percentage of price change
The elasticity of the offer depends on such factors as the peculiarity of the production process, the production time of the product and its peculiarity for long-term storage. The peculiarities of the production process allow the manufacturer to expand the production of goods when the price rises, and when its price decreases, it switches to the production of other products. The offer of such a product is flexible.
The elasticity of supply also depends on the hour factor, when the manufacturer is not able to quickly respond to price changes, since additional production of the product takes a long time. For example, it is almost impossible to increase the production of cars in a week, although the price for them can increase many times. In such cases, the proposal is inelastic. For a product that cannot be stored for a long time (for example, products that spoil quickly), the elasticity of supply will be low.
Many economists identify the following supply-changing factors. Changes in the cost of production due to resource prices, changes in taxes and subsidies, advances in science and technology, new technologies. Lower costs enable the manufacturer to bring more products to market. An increase in prime cost leads to the opposite result - the supply decreases. Changes in prices for other goods, in particular for substitute goods. Individual tastes of consumers. Producers' long-term expectations. With forecasts of price increases in the future, producers can reduce the supply in order to soon sell the product at a higher price, and vice versa, the expectation of a fall in prices forces producers to get rid of the product as soon as possible so as not to suffer losses in the future. The number of producers directly affects the supply, since the more suppliers of goods, the higher the supply, and vice versa, with a decrease in the number of producers, the supply sharply decreases.
29))) Violations of the market equilibrium of prices.
In a competitive system, the equality of supply and demand leads to
balance in all markets. And yet the equilibrium price can change
(the balance point shifts in one direction or another). Some impacts
it is impossible to foresee the market equilibrium of prices, the influence of others can be taken into account
difficult, because they only move the balance point without breaking the laws
supply and demand. The latter impacts include, for example,
taxation.
The tax acts as one of the economic levers of market regulation.
By shifting the point of the equilibrium price, the tax does not violate the laws of demand and
suggestions.
Tax and Equilibrium Market Price.
Taxation is the prerogative of the state applying
many types of direct and indirect taxes. Effects
taxation negatively affects both consumers and
manufacturers of goods. These consequences are expressed in an increase in the price
goods, on the one hand, and in reducing the volume of production of goods - from
another. The increased price is known to cause a decrease in consumer
demand, as a result of which a decrease in the volume of sales of goods is inevitable,
falling under taxation. Manufacturers will react to this situation
unequivocally: they will reduce the production and presentation of goods to the market,
demand for which has decreased.
The violation of the laws of supply and demand did not occur, since the tax
only created the prerequisites for moving the equilibrium point of demand and
offers to a new, higher level.
30))) Resource markets are in many ways similar to commodity markets,
the functioning of which was considered earlier.
Supply and demand theories, categorical
the apparatus of limiting analysis is applicable to the markets
resources in the same way as for commodity markets.
However, if in the commodity markets manufacturers
of goods are firms, and consumers are
households, then in resource markets - the opposite.
Households Own Resources and Offer Them
in the markets.
Each resource has an owner who
receives income from the use of this
Resource Owner Income
Labor Employee Salary
Land Landowner Rent
Capital Capitalist Percentage
Information
(entrepreneurial
capabilities)
Entrepreneur Profit
Resource costs for firms are costs
production.
Every company wishing to maximize its
profit, seeks to reduce costs,
acquiring production resources from
minimal cost.
The firm prefers to purchase more
productive resource.
The price of resources is formed in the market under the influence of the demand for
resources and their suggestions.
The firm forms its demand for resources based on three factors:
demand for finished products, the price of the resource and its
productivity. The main of these three factors is demand.
for finished products. If there is no demand for the product,
produced from a resource, no matter how productive or
the resource was not cheap, there will be no demand for it.
The demand for resources is derived (dependent) on the demand for
finished products. The higher the demand for finished products, the higher
demand for the resources from which it is produced.
The supply of resources depends primarily on the quantity
available resources, prices for them, as well as on the degree of their
interchangeability.
The production costs discussed above represent the cost of inputs acquired by firms in resource markets. These markets are subject to the same laws of supply and demand, the same market pricing mechanism. However, resource markets, to a greater extent than markets for final products, are influenced by non-economic factors - the state, trade unions, and other public organizations (the “green” movement, etc.).
Resource prices that are formed in the respective markets determine:
Income of resource owners (for a buyer, price is a cost, expense; for a seller, income);
Allocation of resources (it is obvious that the more expensive a resource, the more efficiently it should be used; thus, resource prices contribute to the allocation of resources between industries and firms);
The level of the firm's production costs, which with a given technology is entirely dependent on the prices of resources.
In the resource market, households act as sellers who sell their enterprises to enterprises. primary resources - labor, entrepreneurial ability, land, capital and firms that sell to each other the so-called intermediate products - goods needed to produce other goods (timber, metal, equipment, etc.). Firms act as buyers in the resource market. Market demand for resources is the sum of the demands of individual firms. What determines the demand for resources presented by an individual firm?
The demand for resources depends on:
demand for the product, in the production of which certain resources are used, i.e. resource demand is derived demand. Obviously, if the demand for cars grows, then their price rises, output increases and the demand for metal, rubber, plastic and other resources increases;
marginal productivity of the resource, measured, recall, the marginal product ( MR). If the purchase of a machine tool gives a greater increase in output than the hiring of one worker, then, obviously, the firm, all other things being equal, will prefer to buy the machine.
Taking these circumstances into account, each firm, presenting a demand for resources, compares the income that it will receive from the acquisition of a given resource with the costs of acquiring this resource, i.e. is guided by the rule:
MRP = MRC,
MRP - marginal profitability of the resource;
MRC - the marginal cost of the resource.
Marginal profitability of the resource or the marginal product of a resource in monetary terms characterizes the increase in total income as a result of the use of each additional unit of the input resource. By purchasing a unit of resource and using it in production, the firm will increase the volume of production by the amount of the marginal product ( MP). By selling this product (at a price R), the firm will increase its income by an amount equal to the proceeds from the sale of this additional unit, i.e.
MRP = MP × p.
Thus, MRP depends on resource performance and price products.
The marginal cost of the resource characterize the increase in production costs in connection with the acquisition of an additional unit of the resource. In conditions of perfect competition, this increase in costs equal to the price resource.
31)))Labor market and wages.
The labor market is an integral part of the market economy. This is a socio-economic form of movement of labor resources, a way to include labor in the economic system. In conditions market economy labor force acts as a commodity, amenable to assessment and optimization. The labor market is characterized by a system of relationships between buyers (employers), sellers (owners of labor) and infrastructure.
The main subjects of the labor market: the employee and the employer with their own specific forms and structure. They are complemented by intermediaries.
Principles of the functioning of the labor market:
The demand for labor is the solvent need of employers for labor services of workers of certain professions and qualifications. Determined by the needs of enterprises, aggregate demand, technical equipment of production. Labor costs are more important than equipment.
Labor supply is the number of people in need of employment, determined by the amount of working time that the carriers of the labor force agree to work, subject to a certain level of remuneration (sources - graduates; laid off; previously not working or engaged in housekeeping). Determined by the level of wages, the tax system, culture and religion, the strength of trade unions, the amount of unemployment assistance, childcare.
Unemployment is a situation where the supply of labor exceeds the demand for it; shortage in the labor market - when demand exceeds supply, negative consequences in both cases of imbalance.
Wages - the price of labor power. It is influenced by: the cost of labor power - the cost of the means of subsistence is taken into account. Minimum wage, maximum; skill level - difficult work requires better living conditions (high cost); national differences - social conditions, the degree of development of the economy; the state - part of the necessary product in the form of taxes directs to social protection, development of the social sphere; market conditions labor - the ratio between demand and supply of labor. Forms of wages - hourly, working hours, nominal, real.
32)))Land market and rent. Capital market and interest.
Land market - is a market for natural resources required for the production of goods and services. Natural resources - everything that can be used in production in its natural state: fertile land, free places for construction, forests, minerals, etc. The peculiarity of the land supply is its absolute inelasticity. The income of the owner of the land is called rent or land rent. The income received from a factor of production, which is characterized by a completely inelastic supply, is called net economic rent.
Rent is the income earned from the use of a resource with a higher productivity, provided that its supply is inelastic.
Land tenure means the recognition of the right of a given (natural or legal) person to a certain piece of land on a historically established basis. Most often, land tenure refers to the ownership of land. Land ownership is carried out by land owners.
Land use is the use of land in the manner prescribed by custom or law. The user of the land is not necessarily the owner of the land. In real economic life, subjects of land ownership and land use are often personified by different individuals (or legal entities).
The capital market is a part of the financial market in which long money circulates, that is, money with a circulation period of more than a year. In the capital market, there is a redistribution of free capitals and their investment in various profitable financial assets. The forms of circulation of monetary funds (financial resources) in the capital market can be different: bank loans (loans); stock; bonds; financial derivatives.
Bank loan (credit) - a cash loan issued by a bank for a specified period on terms of repayment and interest payment.
Loan - the transfer of money, things and other property by the lender to the borrower under a loan agreement or under a gratuitous use agreement on terms of return.
A share is an equity security securing the rights of its owner (shareholder) to receive part of the profit of a joint-stock company in the form of dividends, to participate in the management of the joint-stock company and to a part of the property remaining after its liquidation. Usually a share is a registered security.
Bond is an issue-grade debt security, the owner of which has the right to receive from the issuer of the bond within the agreed period of time its par value in cash or in the form of another property equivalent. A bond may also provide for the owner's right to receive a fixed percentage (coupon) of its par value or other property rights.
Derivative - an agreement (contract) that, in accordance with its terms, provides for the parties to the agreement to exercise rights and / or fulfill obligations associated with a change in the price of the underlying asset underlying this financial instrument, and leading to a positive or negative financial result for each party ...
Interest income (interest) is the return on capital invested in a business. This income is based on the costs of the alternative use of capital (money always has alternative uses, for example, it can be put in a bank, spent on stocks, etc.). The amount of interest income is determined by the interest rate, i.e. the price that the bank or other borrower must pay to the lender for using the money over a period.
33)))Production volume: aggregate average and marginal product. The law of diminishing returns
SCOPE OF PRODUCTION - the result of the activity of the enterprise for the production of any products and provided production services.
In order to reflect the influence of a variable factor on production, the concepts of total (total), average and marginal product are introduced.
Total product (TP) is the amount of an economic good produced using some quantity of a variable.
The marginal product (MP) of a variable factor of production is an increase in output obtained through the use of an additional unit of this factor. The marginal product characterizes the marginal productivity of a given factor of production.
The law of diminishing returns, or the law of diminishing marginal product, or the law of changing proportions, are all different names for the same law.
The law of diminishing returns states: as the use of any production factor increases (with the remaining production factors being fixed), a point is eventually reached at which additional use of this factor leads to a decrease in output.
The law of diminishing returns is that, starting from a certain moment, the successive addition of units of a variable resource (for example, labor) to an unchanging, fixed resource (for example, capital or land) gives a decreasing additional, or marginal, product per each subsequent unit variable resource.
In other words, if the number of employees serving a given direction of activity increases, then the growth in the volume of production will occur after a certain moment more and more slowly, as the number of workers in production increases.
34)))Production costs, their types. Positive and negative economies of scale
Production costs are expenses, cash expenditures that must be carried out to create a product. For the enterprise (firm), they act as payment for the acquired factors of production. These costs cover the payment of materials (raw materials, fuel, electricity), wages of employees, depreciation, costs associated with production management. When selling a product, an entrepreneur receives cash proceeds. One part of it compensates for the costs of production (that is, the cost of money associated with the production of goods), the other gives profit, that for the sake of which production is organized. This means that the cost of production is less than the value of the goods by the amount of profit. Thus, production costs are the costs of producing a given finished product, in contrast to the one-time costs associated with the advancement of capital, which is needed for the initial organization of the production process.
Alternative "explicit" and "implicit" costs
Opportunity cost is the cost of producing a good, estimated from the point of view of the lost opportunity to use the same resources for other purposes. Opportunity costs faced by firms include payments to workers, investors, and natural resource owners. All these payments are made with the aim of attracting factors of production, distracting them from alternative uses.
From the point of view of economics, opportunity costs can be divided into two groups: "explicit" and "implicit".
Explicit costs is an opportunity cost that takes the form of cash payments to suppliers of factors of production and intermediate goods. Explicit costs include: workers' wages; payment of transportation costs; communal payments; payment for the services of banks, insurance companies; payment of suppliers of material resources. Implicit costs- this is the opportunity cost of using the resources owned by the firm itself, that is, unpaid costs.
Production costs, including normal or average profit, represent economic (imputed) costs.
Internal costs are associated with the use of their own products, which turns into a resource for further production of the company. External costs are expenditures of money that are made to acquire resources that are owned by those who do not belong to the owners of the firm. The costs incurred by the firm in the production of a given volume of products depend on the possibility of changing the amount of all resources employed.
Fixed costs are costs that are not dependent in the short run on how much the firm produces. They represent the costs of its constant factors of production. Permanent the costs are related to the very existence of the firm's production equipment and must therefore be paid even if the firm does not produce anything. A firm can avoid the costs associated with its fixed factors of production only by completely ceasing its activities. Fixed costs, which cannot be avoided even if the activity is terminated, are called irrevocable costs. The cost of renting office space for a company is a fixed cost that is not irrecoverable, since the company can avoid these costs by stopping its activities. But if a firm closes temporarily, it can evade payment for any variable factor of production. Variables costs are costs that depend on the volume of the firm's output. They represent the costs of the variable factors of production of the firm. These include costs for raw materials, fuel, energy, transportation services, etc. Most of the variable costs, as a rule, fall on the cost of labor and materials. To understand whether it is profitable to produce an additional unit of output, it is necessary to compare the subsequent change in income with the marginal cost of production. Limit cost is the cost associated with producing an additional unit of output.
Economies of scale associated with a change in the cost of a unit of production, depending on the scale of its production by the company. Considered in the long term. Reducing unit costs when scaled up is called economies of scale. The shape of the long-run cost curve is related to economies of scale.
Positive Economies of scale occur when, with an increase in the quantity of products produced and the level of market power, the cost per unit of output decreases. Usually associated with a deepening division of labor. Thanks to this effect, the transition from manual labor to manufacture and then to the conveyor belt with a simultaneous increase in production turned out to be very profitable. There is also the possibility of using expensive technologies and the production of by-products from waste. While there is a positive effect of scale - the enterprise should increase its production capacity.
Negative economies of scale. The opposite of the positive effect in which average costs increase with the growth of the enterprise. It is associated with a certain loss of controllability and a decrease in the flexibility of reaction to changes in the external environment, an increase in intraorganizational contradictions. It is observed due to technical reasons in the extraction of minerals, due to the fact that it is more difficult to extract each subsequent ton of coal or a barrel of oil from the ground than the previous one.
35)))Enterprise income: total, average and marginal income
Income of enterprises is an increase in economic benefits as a result of the receipt of assets (cash, other property) and (or) the repayment of liabilities, leading to an increase in the capital of the enterprise of this enterprise, with the exception of contributions from participants (owners of property).
Revenues from other legal entities and individuals are not recognized as income:
the amount of taxes;
under a commission agreement and other similar agreements in favor of the principal, etc .:
by way of prepayment for products, works, services;
deposit, pledge;
loan repayment.
Total income is the amount of revenue that a firm receives from the sale of a product on the market. In general, a firm sells a product at different prices and, therefore, the total income can be represented as the sum of the income received at each price, which is equal to the product of the price of the product and the number of units of the product sold:
Average income is the total income per unit of output:
Marginal revenue is the increment in the total revenue of the firm as a result of the sale of an additional unit of goods:
36)))Profit, its types, profit maximization
Profit - acts as an excess of income from the sale of goods (services) over the costs incurred (capital).
Profit is one of the generalizing estimated indicators of the activities of enterprises (organizations, institutions).
Currently, the following types of profit are distinguished:
Balance sheet profit or loss is the amount of profit or loss received from the sale of financial activities, products, income from other non-sale operations, and they are reduced by the amount of all expenses on these operations.
Profit from common types activities or from the sale of works, services, products. It is the difference between all proceeds from the sale of products at current prices without special tax, excise taxes, VAT and the cost of producing and selling them.
Profit or loss from financing activities and from other non-operating transactions is the result of transactions that are the difference between the amount of all received and paid fines, penalties, penalties, interest, exchange differences on all foreign currency accounts, past losses and profits that were identified in the reporting year, and so on.
Taxable profit is the difference between the balance sheet profit and the sum of rental payments, income taxes, import and export taxes.
Net profit is directed to social, industrial development, the creation of reserve funds, material incentives for all employees, to pay various economic sanctions to the budget, to charity and so on.
Consolidated profit, consolidated for all financial statements of activities and, in addition, financial results of subsidiaries and parent companies.
Maximizing profit - represents the difference between the marginal revenue from the sale of an additional unit of production and the marginal cost.
Limit costs - additional costs leading to an increase in output by one unit of good. Marginal cost is entirely variable cost, because fixed cost does not change with output. For a competitive firm, marginal cost is equal to the market price of the good.
In the case of profit maximization, the difference between the proceeds from its sale and the cumulative costs reaches a maximum. Maximization of the total profit of an enterprise takes place when the price of a product becomes equal to the marginal costs of its production and circulation.
Changes in the price of a product do not always cause the same market response. One product, after the increase in value, stops buying almost completely. The other is being actively purchased, despite the price increase and the decline in income.
Types of elasticity
Depending on what factor was the reason for the decrease or increase in the demand for products, different types of the phenomenon under consideration are distinguished.
Price elasticity of demand occurs when the response of buyers is associated with a change in the value of goods. If the latter has grown, then this leads to two possible results. Either consumers buy less of the product, or they buy it in the same quantity as before. In the first case, it is said that demand is elastic, and in the second, it is not.
Another type of this indicator depends on the availability of money among consumers. The income elasticity of demand indicates whether a customer will purchase a particular product in smaller or larger quantities if his or her income decreases or increases.
Finally, it so happens that the value of one product changes, and a decrease or increase in demand affects another product. The cross-elasticity of demand characterizes the degree of such changes.
Income elasticity of demand
Elasticity coefficients show the amount of change in demand with a decrease or increase in income or prices. To calculate the price elasticity of demand, you need to determine the percentage of the change in the volume of demand to the change in income.
The connection is not always straightforward. It depends not only on the cost, but also on the product category. Essential goods will have zero income elasticity. Both the poor and the rich buy bread and pay for utilities.
If the product belongs to a low quality category, then the income elasticity will have a negative value. The richer a household is, the less it buys cheap and low-grade products.
The demand for the so-called normal goods (of which the majority) has a positive coefficient. People with an increase in income increase the consumption of these goods.
Price elasticity coefficient
This ratio is determined by calculating the ratio of the change in the volume of demand to the change in price. The result is expressed as a percentage.
Elasticity is considered high if even a small increase in price reduces demand. It can have a single value if a 1% change in value causes a 1% shift in sales results. If demand hardly changes with a significant rise or fall in prices, then this is inelastic demand.
It is possible to distinguish absolutely inelastic or absolutely elastic demand. In the first case, consumption does not change at all, no matter what happens to the price. For example, essential medicines are purchased in the same quantity, even if their cost rises significantly. In the second case, the opposite is true.
Cross elasticity coefficient
The coefficient of cross-elasticity of demand for a good is the ratio of the percentage change in demand for the first good to the percentage change in the demand for another product.
The coefficient of cross-elasticity of demand can be with a plus or minus sign. It depends on how the products are related. If they are interchangeable, then the coefficient will be positive. For example, butter can be replaced with margarine, pork with beef, white bread with black bread, coal with wood, etc. The higher the coefficient, the more opportunities to find analogues among the products under study. For example, if the price of butter rises, the demand for margarine will increase.
The coefficient of cross elasticity of demand will take a negative value in the case of complementary things. For example, when it comes to cars and gasoline, meat and ketchup, etc. The increase in the cost of the car will lead to a drop in the demand for fuel. After all, if consumers buy cars less often, then they will need less refueling services.
Asymmetric cross elastic
A borderline case is possible when the indicator is zero. This happens if the goods are independent of each other, and the change in the value of one of them does not in any way affect the level of demand for the other. Cement sales have nothing to do with the rise in the price of bread. There is no relationship between the fall in the price of butter and the demand for bedding.
It should be remembered that the cross-elasticity of demand for a product is asymmetric. That is, the pattern does not necessarily work in both directions. Lower meat prices could boost sales of ketchup. But the reduction in the price of tomato sauce is unlikely to stimulate the consumption of pork or beef.
Why Cross Elasticity Coefficients are Needed
These indicators allow you to find out what type of product the product belongs to (interchangeable or complementary). In practice, this is not as easy as it seems.
Everything is relatively simple when there is a general decline in the material well-being of the population, for example, during a crisis. The overall purchasing activity of consumers will fall, and this will be the income elasticity of demand. Cross-elasticity reveals less obvious relationships. For example, when comparing a product and a service.
For example, when the price of new shoes rises, services for its repair become more in demand. And if the other way around? Will consumers buy more new shoes if it becomes more expensive to fix old ones?
Also, the cross-elasticity of demand shows how much a particular firm has monopolized the industry. If, with an increase in prices by this company, consumers switch to similar products from other organizations, then it is no longer possible to call the first company a monopolist.
Cross elasticity and pricing
Indicators are important not only for analyzing possible changes in demand when there are similar products from other firms on the market. Competition can occur between goods produced by the same enterprise.
Large companies often offer a large selection of interchangeable (several types of soap, powder, bread, etc.) or complementary (shampoo and conditioner, razors and blades, vacuum cleaners and filter replacements). The study of cross-elasticity helps in developing a pricing strategy to maximize overall profitability.
Cross Elasticity in Determining Industry Boundaries
The cross-sectional elasticity of demand can show the boundaries of industries. True, with some reservations.
So, if the coefficient of this elasticity is high, then we can say that the studied goods belong to the same industry. If the cross-elasticity of a product is low in relation to all other products, then it forms a separate industry.
This method of defining the boundaries between spheres has drawbacks. For example, it is difficult to figure out what the level of cross elasticity should be. Let's say that different types of frozen vegetable mixes are easily substituted for each other. But this does not mean that instead of frozen dumplings, the consumer is ready to buy chilled vegetables, although both products are frozen products. Whether the production of such dumplings and vegetables should be considered one industry or two is unclear.
Elastic factors
The elasticity of demand depends not only on prices and incomes, but also on other factors.
First, it is important whether the product has analogues. The more substitutes, the more elastic the demand. If a certain brand of clothing rises in price, then the consumer can easily switch to another brand. That is, the cross-elasticity of demand will be high.
It's another matter if the price of a vital medicine rises. A person who has diabetes will always buy insulin, since the medicine is necessary and irreplaceable.
Second, there is a difference between essential goods and luxury goods. If a family always ate a loaf of bread every day, then it is unlikely that its rise in price will change anything. The household will continue to buy one loaf every day. The same applies to salt, sugar, soap, matches, etc. If jewelry, without which it is quite possible to live, soars in price, then the consumer will save on them.
Thirdly, the share of expenses on goods in the overall structure of spending affects. For example, less money is spent on bread than on buying a car. Therefore, if all prices rise, then people would rather refuse to buy a car than bread.
Finally, it is important how much time households have to make a decision. It is not always possible to quickly find a replacement for a product, therefore, in the short term, demand will be less elastic. Gradually, consumers adapt, finding analogues or learning to do without this or that product, so the volatility of demand in the long run is higher.
We now know what the cross elasticity of demand is and what it is for.
Cross elasticity of demand characterizes the relative change in the volume of demand for one product when the price of another changes. The concept of cross elasticity of demand is used to determine the degree of influence on the amount of demand for a given product by changes in the price of another product.
The coefficient of cross-price elasticity of demand is the ratio of the relative change in demand for the i-th product to the relative change in the price of the j-th product.
If EijD> 0, then goods i and j are called interchangeable (substitutes), an increase in the price of the j-th good leads to an increase in demand for the i-th (for example, different kinds fuel).
If EijD< 0, то товары i и j называют взаимодополняющими (комплементами), повышение цены j-того товара ведет к падению спроса на i-тый (например, автомашины и бензин).
If EijD = 0, then such goods are called independent, an increase in the price of one product does not affect the volume of demand for another (for example, bread and cement), where Qi is the quantity of the i-th product, then Pj is the price of the j-th product.
When the price of the substitute product changes, the cross-elasticity coefficient will be Above zero(for example, an increase in prices for beef meat will cause an increase in demand for poultry meat).
When the price of a compliment product changes, the cross-elasticity coefficient will be less than zero (for example, an increase in the price of gasoline leads to a decrease in demand for cars).
The calculation of the coefficient of cross-price elasticity of demand allows you to answer how many percent the value of demand for good A will change if the price of good B changes by one percent. The calculation of the cross elasticity coefficient makes sense, first of all, for substitute goods and complement goods, since for weakly interrelated goods the value of the coefficient will be close to zero.
Consider the example of the chocolate market. Suppose we also conducted observations of the halva market (substitute chocolate product) and the coffee market (chocolate complement product). Halva and coffee prices changed, as a result, the volume of demand for chocolate changed (assume all other factors are unchanged).
Applying the formula, we calculate the values of the coefficients of the cross-price elasticity of demand. For example, if the price of halva is reduced from 20 to 18 den. units demand for chocolate decreased from 40 to 35 units. The cross elasticity coefficient is:
Thus, if the price of halva decreases by 1%, the demand for chocolate in this price range decreases by 1.27%, i.e. is elastic with respect to the price of halva. Similarly, we calculate the cross-elasticity of demand for chocolate with respect to the price of coffee, if all market parameters remain unchanged and the price of coffee decreases from 100 to 90 den. units:
Thus, when the price of coffee decreases by 1%, the value of demand for chocolate increases by 0.9%, i.e. the demand for chocolate is inelastic relative to the price of coffee. So, if the coefficient of elasticity of demand for good A at the price of good B is positive, we are dealing with interchangeable goods, and when this coefficient is negative, goods A and B are complementary. Goods are called independent if an increase in the price of one good does not affect the amount of demand for another, i.e. when the cross-elasticity coefficient is zero. These provisions are true only when small changes prices. If price changes are large, then the demand for both goods will change under the influence of the income effect. In this case, the goods may be mistakenly identified as complements.
The value of the cross-elasticity coefficient depends on which goods are considered: interchangeable or complementary. If the goods are interchangeable, the cross-elasticity coefficient will have positive value... So, a rise in price butter will cause an increase in demand for margarine, a decrease in the price of Borodino bread will lead to a decrease in demand for other types of black bread. If the goods are complementary, such as gasoline and cars, cameras and film, the amount of demand will move in the opposite direction to price changes, and the coefficient of elasticity will have a negative value.
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By measuring the cross-elasticity, it is possible to determine whether the selected goods are complementary or interchangeable and, accordingly, how a change in the price of one type of product produced by a firm may affect demand for other types of products of the same firm. Such calculations will help to evaluate decisions on changes in prices for manufactured products.
Cross-elasticity is widely used in antitrust policy: evidence that a firm is not a monopoly of a particular good is the fact that the firm's product has a positive cross-elasticity of demand with another firm's product.