Topic 22. MARKET POWER: MONOPOLISTIC COMPETITION (POLYPOLY)

1. The similarity of polypoly with perfect competition and monopoly
2. Specific features of polypoly
3. Profit maximization under polypoly conditions
1. The similarity of polypoly with perfect competition and monopoly. Monopolistic competition(polypoly) - a market structure in which there are many firms selling similar, but not the same products. It is similar to both monopoly and perfect competition at the same time, since in the short run a monopolistic competitor behaves like a monopolist, and in the long run like a perfect competitor.
2. Specific features of polypoly. The properties of monopolistic competition lead to the following results: in the long run, due to low barriers, firms can enter the market if there are excess profits and leave it in case of losses. As a result, the market is in a state of perfect competition. But the polypolist in this situation behaves differently and still receives excess profit, since, unlike a perfect competitor, he has:
a) there is excess production capacity, allowing it to regulate the volume of production;
b) marginal cost is not equal to price.
It is because of these two differences that a monopolistic competitor in the long run is similar, but not identical, to a perfect competitor.
3. Profit maximization in a polypoly. Profit maximization is carried out by a monopolistic competitor within the framework of the general rule for imperfect competition MC= MR< P with the peculiarity that he sets the price for his product floating in a certain range. Outside the range - extreme points: on the left - monopoly, on the right - perfect competition.
Maneuvering the polypoly within the range of overcapacity helps it attract additional buyers when prices go down.
On the graph, you can track this process (Fig. 22.1).

With limited options in price competition, polypo sheets are very sensitive to marketing where between them unfolds non-price competition(Fig. 22.2).
In general, monopolistic competition is less efficient than perfect competition, since here the marginal cost is below the market price, which leads to the withdrawal of part of the “consumer surplus” in favor of the seller.

Topic 24. ANTI-MONOPOLY REGULATION OF THE MARKET

1. Antimonopoly policy of the state. The market operates according to certain principles, which the monopoly undermines. Therefore, the fight against monopoly is at the same time the defense of the basic principles of the market economy.
Antitrust policy- this is a purposeful activity of state bodies to protect and strengthen competitive principles in the economy and create obstacles to the emergence of excessive power of monopolies.
This policy finds expression in the following actions:
– prevention of the formation and reduction of the existing sphere of monopoly pricing;
– development of antimonopoly legislation and its application in economic practice;
– exclusion of conditions for the emergence of a deficit in the economy;
- carrying out decentralization of resources with their excessive concentration in one hand;
- forced unbundling of firms that monopoly control the market.
2. Regulation of the activities of a natural monopoly. natural monopoly It is a type of monopoly that cannot be eliminated without harm to society.
It occurs in areas where one producer, using the positive effect of scale of production, satisfies completely the market demand. If, under these conditions, forced competition between producers is introduced, then their total costs will exceed the level of costs of the former monopolist, which will inevitably cause a rise in prices (for example, the supply of competing water, electricity, gas networks to a residential city house).
3. Antimonopoly policy of the state. The state is interested in ensuring that natural monopolists do not abuse their position.
In the most developed form, antitrust law exists in the United States, where it first appeared in 1890 with the adoption of the antitrust law. Sherman law.

Topic 25. DEMAND FOR FACTORS OF PRODUCTION

1. Features of the market of factors of production. The market sells not only goods and services that go into the final personal consumption of the population, but also the factors by which they are produced. At the same time, the market for factors of production has the following differences from the commodity market: a) the demand for factors of production is secondary, derived from the demand for goods; b) the more easily a factor is substituted in production, the more elastic the firm's demand for it in the factor market.
2. Rental and capital price of a factor of production. Labor, land, capital in the production process are used repeatedly over a long period of time, often for years. Their price has two levels - this is the rental and capital price.
Rolling price factor- the amount of money paid for its use within a certain limited period.
Capital factor price- the total price resulting from the summation of the individual rental prices of the factor for the entire period of its use.
3. Conditions for the optimal combination of factors. The entrepreneur makes an additional demand for a factor of production only on the condition that it will bring him additional revenue. Moreover, the increase in revenue must exceed the increase in costs. If they become equal, then this will be a signal to stop increasing production volumes and, accordingly, market demand for a factor of production. In this state, the firm maximizes profit.
The increase in the total income of the firm is affected not only by the marginal income from an additional unit of resource, but also by the increase in the volume of production. Therefore, if, for example, labor acts as such a factor, then:
MRPL=MR x MPL,(25.1)
Where MRPl– marginal profitability from the “labor” factor; MR- marginal income; MPL is the marginal product of the labor factor.
With the expansion of production, the marginal profitability of a factor of production decreases due to the action in the economy law of diminishing marginal productivity.
With perfect competition MR= P, That's why:
MRPL = P x MPL.(25.2)
The marginal return of the labor factor shows how much the firm is willing to pay for hiring an additional worker, i.e. MRPl= W, Where W- Salary of an additional worker. In general, equality
W = MRPL=MR x MPL(25.3)
allows answering the question: what should be the firm's demand for the "labor" factor in order to maximize its profit? The same applies to other factors - capital (TO) and ground (N):
A ) rK = MR x MPk;(25 4)
b) rN=MR x MPN,
Where rK– income from capital; rN- Income from the land.
Having reduced the income from various factors (labor, land and capital) into general equality, we obtain the condition for the optimal combination of factors:

To minimize production costs, the ratio of the costs of using factors to the value of its product must be the same for all factors and equal to the marginal income.
To maximize profit, this condition must be supplemented by equality with marginal cost.
Compliance with the optimality condition for the combination of factors allows you to replace one factor with another.

Topic 26. LABOR MARKET

1. Features of the labor market. Labor market- a specific market, since it sells not just goods and services, but the ability of people to create them. This market cannot exist on the principle of complete self-regulation. The state has been regulating labor relations in the economy since ancient times.
The most important category of the labor market is wage- the amount of money that the employee receives for work. However, wages are not only a form of income for the seller, but also the price of labor - for the buyer, paid by him for the right to use for a certain time.
2. Demand in the labor market. The market demand for labor, in accordance with the law of demand, is inversely related to wages. This dependence finds a graphical expression in the labor demand curve (Fig. 26.1).
Labor demand curve w\ specific, as it has restrictions from above and below. The demand for labor is dictated by the need for the entrepreneur to make a profit - otherwise it is pointless to do business. It is this situation that is illustrated by the LD curve limitation L.D.
The lower limit also makes economic sense and is caused by the fact that the employee needs to restore his labor activity; support a family; study, be treated, improve one's skills, etc. In addition, a person needs various social, spiritual and material benefits (religion, leisure, culture, sports, etc.).

All of the above requires funds and should be objectively taken into account in the price of labor. Based on the lower limit of the price of labor, minimal salary, providing a minimum for the worker.
3. Supply in the labor market. The supply of labor in the market also depends on the size of wages, but this dependence is opposite to demand: with an increase in wages, supply increases (Fig. 26.2).
There are two effects on the supply side of labor - substitution and income.
The combined action of these effects leads to the fact that the supply curve is modified and takes on an unusual shape (Fig. 26.3).
4. Equilibrium price for the "labor" factor. If we combine the graphs of demand and supply of labor, we get a graph that characterizes the equilibrium price (Fig. 26.4).

Topic 27. WAGES AND EMPLOYMENT

1. The essence of wages. Wage acts as a reward for labor and is the price of labor in its purchase and sale.
Wages in modern theory are considered in two ways:
1) as a person's total earnings, which includes fees, bonuses, various remuneration for work;
2) as a rate or price paid for the use of a unit of labor in a fixed period of time (hour, day, week, month, year).
The level of wages is under the simultaneous influence of the entire social environment of society and the market mechanism. Therefore, the named distinction avoids confusion of their impact on wages.
2. Nominal and real wages. The incomes of employees have a monetary value, and money depreciates in conditions of economic instability and rising prices. Consequently, the wages of workers are dependent on the amount of inflation. In order to track this dependence, a distinction is made between nominal and real wages.

Profit maximization under imperfect competition (pure monopoly, monopolistic competition)

With imperfect competition, as the number of products that appear on the market increases, the price of it gradually falls. We can say that each subsequent unit of the firm's product under such conditions is sold at a lower price than the previous one. This suggests that the monopoly firm is not interested in producing an arbitrarily large number of products, since this can significantly reduce the price of its products, which will put the company in an unfavorable economic position. The firm cannot also limit its output by significantly raising the price. With a high price on the market, these goods may not find their buyer at all. Consequently, monopoly enterprises are forced to seek a position in the market that will enable them to maximize their profits at a certain volume of output and an appropriate price. Having specified certain data on the work of the monopolist firm, we will analyze the process of formation of total income, marginal and average income, and then compare them with total costs (Table 1)

When analyzing the above data, it can be seen that as a result of a constant price decrease, total income (TR) first increases from 0 to 25, and then begins to decrease, since the price decrease is no longer compensated by the increase in output.

According to Table 1, we construct the curves of total income (TR), total costs (TC), average income (AR) and marginal income (MR) - fig. 1

The constant decrease in price has another consequence - this is the decreasing nature of the average and marginal incomes. Indeed, in conditions of imperfect competition, each additional unit of product sold brings an average income of less than the previous one. Figure 1 shows the decreasing nature of AR and MR, with MR decreasing at a faster rate than AR, although initially at a minimum output (change in Q from 0 to 1) they are equal. The mean income is zero when the total income is also zero, while the MR crosses the x-axis at the maximum TR.

Combining the graph of total costs and total income, three sectors can be distinguished. In the first, TC exceeds TR, so the firm has a negative profit, or incurs a loss (Fig. 1a). At point A, with an output of two units, TR = TC, so the total profit is zero. The firm begins to make a profit as soon as total revenue exceeds total costs. As the latter increase, the difference between TR and TC, having reached its maximum, begins to decrease, and at point C returns to zero. With a further increase in production, the firm again suffers losses.

When analyzing the work of a particular firm, we showed that profit is maximized under the condition that MR = MC. This rule also applies to a monopolist. Table 1 shows that TPr reaches its highest value at four units of production. It is at this point that the value of MC is closest to MR, and on the graph (Fig. 1a), the slope of the tangent at point B is equal to the slope of the tangent to the curve of total costs at point C. Therefore, it is at this volume that the firm, in conditions of imperfect competition, maximizes your profit.

This approach to determining the profit maximization point is not the only one. With this approach, the analysis of many indicators of the firm's performance remains behind the scenes, in particular, indicators of average values, such as average total costs and average variable costs, are not used. There is no possibility of analyzing the behavior of the firm with a changing price, which is very important for a monopoly firm. Determining the maximum point of a firm under imperfect competition by comparing the total income and costs of the firm does not answer what the price will be.

A more detailed analysis of the company's work occurs with a different approach, when the profit maximization point is determined through the marginal and average values ​​that characterize the company's activities in a changing market environment.

Introduction 3

1 Profit as the goal of the firm. Types of profit 5

2. Profit maximization under perfect competition 10

2.1. Short term 10

2.2 Long term 14

3. Profit maximization in conditions of imperfect competition 18

3.1. Monopoly 18

3.2. Oligopoly 25

3.3. Monopolistic competition 30

Conclusion 35

List of sources used 37

Introduction

Profit is the monetary expression of the main part of the monetary savings created by enterprises of any form of ownership. As an economic category, it characterizes the financial result of the entrepreneurial activity of the enterprise. Profit is an indicator that most fully reflects the efficiency of production, the volume and quality of manufactured products, the state of labor productivity, and the level of cost. At the same time, profit has a stimulating effect on the strengthening of commercial calculation, the intensification of production under any form of ownership.

Profit is one of the main financial indicators of the plan and assessment of the economic activity of enterprises. At the expense of profits, financing of measures for the scientific, technical and socio-economic development of enterprises, an increase in the wage fund of their employees is carried out. It is not only a source of ensuring the intra-economic needs of the enterprise, but is becoming increasingly important in the formation of budgetary resources, extra-budgetary and charitable funds.

The problem of profit maximization is one of the main problems for any entrepreneur, since profit is the main goal of entrepreneurial, including production activities. Thus, the functioning of enterprises and industries is aimed at obtaining the greatest profit through the production and sale of goods and services in demand by the market. This is how the needs of the population are best met.

Making a profit and increasing it is an economic condition for the successful functioning of industrial enterprises. This is the only way to update fixed assets in a timely manner, expand the scale of production, create prerequisites for increasing production efficiency and increasing competitiveness.

In any case, firms that are not deeply involved in profit maximization have little chance of survival. Firms that survive in specific industries make long-term profit maximization a top priority, regardless of the will or desire of their leaders.

The purpose of this work is to study the behavior of firms that maximize their profits in conditions of perfect and imperfect competition. Research objectives: to identify how firms operating in different markets choose the optimal volume of output in the short and long term, what indicators influence their choice, to determine how firms maximize their profits in different situations, to find differences in their behavior.

1 Profit as the goal of the firm. Types of profit

In quantitative terms, profit is the difference between total revenue and costs, but if there are two approaches to defining and measuring costs, then the content of the concept of “profit” should be considered in two aspects - accounting and economic.

Accounting profit - is the difference between total revenue and external costs. Recall that the latter include explicit, actual costs: wages, fuel, energy, auxiliary materials, interest on loans, rent, depreciation, etc.

In economic theory and practice, the totality of fixed and variable costs is referred to as business costs. The total economic costs, together with normal profit, constitute economic costs (costs). The difference between total revenue and economic costs forms economic, or net profit.

economic profit there is a certain surplus of total income over economic costs. Unlike accounting profit, which takes into account only external costs, economic profit is determined by subtracting both external and internal costs (including normal profit) from revenue. External and internal costs in the sum form economic, or opportunity, costs. This means that when determining the amount of real profit, one should proceed from the price of a resource that its owner would receive if it were used to the best advantage.
Economic costs make it possible to understand the difference between the approaches of an accountant and an economist to the evaluation of a firm's performance. The accountant is primarily interested in the results of the company's activities for a certain (reporting) period. He analyzes the past, existing experience in the activities of the company. The economist, on the contrary, is interested in the prospects of the company, its future. That is why he keeps a close eye on the price of the best alternative for using the resources he has.

The presence of economic profit is of interest to the manufacturer in this particular business area. At the same time, it encourages other firms to enter the field. This contributes to the expansion of the circle of producers, the increase in supply and, for reasons known to us, the decrease in the market price. The latter leads to a decrease (and possibly to the disappearance) of economic profit, which causes an outflow of a number of firms from this business area and attempts to penetrate them into other areas. A decrease in the number of producers will lead to a reduction in supply and, as a result, to an increase in market prices. Economic profit will again become positive and will grow.

For the company, the issue of profit is important. There are absolute and relative indicators of profit. As for the absolute value of profit, it is expressed by the concept of “mass of profit”. By itself, the mass of profits does not say anything, so this value should always be compared with the annual turnover of the company or the value of its capital. At the same time, the indicator of profit dynamics is also important, comparing its value in a given year with the corresponding value of previous years.

A relative indicator of profit is the rate of profit (profitability), demonstrating the degree of return of production factors used in production. Distinguish between the profitability of production and the profitability of a particular type of product.

Profitability of production shows the degree of return of all advanced capital and is expressed by the formula

Rpr \u003d Pb / Kav 100% or Rpr \u003d Pb / (OPF + MOS) 100%,

where Ppr - profitability of production, Pb - profit (balance sheet); Kav - all advanced capital, OPF - basic production assets; MOS - material working capital.

An indicator characterizing the efficiency of the company's current costs is the profitability of products, calculated by the formula

Rotd.pr \u003d Pb / Sp 100%,

where Rotd.pr - profitability of a particular type of product; Cn is the cost of production (full).

Here the cost form of production efficiency is expressed, because the ratio of the result of production to current costs is given. This formula shows the degree of profitability of the production of a particular product.

The main ways to increase profitability are to reduce the cost of elements of advanced capital, reduce current costs of production. Ultimately, the condition for both is the widespread use in production of the results of scientific and technological progress, leading to an increase in the productivity of social labor and, on this basis, a decrease in the cost of a unit of resources used in production.

The essence of profit is most fully manifested in its functions: accounting, stimulating and distributive. essence accounting function Profit is that profit is the most important criterion for the effectiveness of a firm's entrepreneurial activity. The main indicators that reveal this function are the mass and the rate of return (profitability). Stimulating function profit is that it (profit) is a powerful generator of the economy. It is the desire to increase profits that underlies most innovations. essence distributive function profit lies in the fact that it serves as a source of accumulation and development of production, a source of material incentives for workers. In a market economy, profit is the basis for the development of an entrepreneurial firm.

Profit maximization is the firm's choice of a price for a product that will maximize profit and cash flow and maximize cost recovery. The task of profit maximization is to determine the position of dynamic equilibrium between supply and demand, to find the optimal combination of sales volume and price for products. In this situation, the firm has no choice but to choose the sales volume that would maximize its profits. It is believed that the volume of sales that will provide maximum profit and will be optimal.

The optimal output volume is the volume that allows the firm to maximize profits. The firm makes a profit by selling its own products. Thus, the firm must address three questions:

Is it worth making this product?

If so, then to what extent?

What profit will be received from this?

2. Profit maximization under perfect competition

In economic theory, perfect competition is a form of market organization in which all types of rivalry are excluded, both between sellers and between buyers. Thus, the theoretical concept of perfect competition is in fact a negation of the usual understanding of competition in business practice and everyday life as a sharp rivalry between economic agents. Perfect competition is perfect in the sense that with such an organization of the market, each enterprise will be able to sell as many products as it wants at a given market price, and neither an individual seller nor an individual buyer can influence the level of the market price.

When determining a market behavioral strategy, simplifications are usually allowed: it is believed that the company produces one type of product, although in reality a number of products are produced; it is assumed that the only goal of the firm is to maximize profits from the production of a given product in both the short and long run, although in reality this is not the case, because maximizing income (in order to achieve economic growth) or maximizing the level of dividends in order to create company image, etc.

According to the traditional theory of the firm and the theory of markets, profit maximization will be the main goal of the firm. Therefore, the firm must choose such a volume of supplied products, ɥᴛᴏto achieve maximum profit for each period of sales.

PROFIT - ϶ᴛᴏ the difference between gross (total) income (TR) and total (gross, total) production costs (TC) for the sales period:

profit = TR - TS.

Do not forget that gross income– ϶ᴛᴏ the price (P) of the goods sold multiplied by the volume of sales (Q)

Since the price is not affected by a competitive firm, then it can affect its income solely through a change in sales volume. If the firm's gross income is greater than its total costs, then it makes a profit. If the total costs exceed the gross income, then the firm incurs losses.

total costs- ϶ᴛᴏ costs of all factors of production used by the firm in the production of a given volume of output.

Maximum Profit achieved in two cases:

a) when the gross income (TR) exceeds the total costs (TC) to the greatest extent;

b) when marginal revenue (MR) is equal to marginal cost (MC)

Marginal Revenue (MR)– ϶ᴛᴏ the change in gross income received from the sale of an additional unit of output. It is worth saying that for a competitive firm, marginal revenue is always equal to the price of the product:

The marginal profit maximization is the difference between the marginal revenue from the sale of an additional unit of output and the marginal cost:

marginal profit = MR - MC.

marginal cost Additional costs that increase output by one unit of the good. Marginal cost is entirely variables costs because fixed costs do not change with output. It is worth saying that for a competitive firm, marginal cost is equal to the market price of the product:

The marginal condition for profit maximization will be such a volume of output, at which price equals marginal cost.

Having determined the profit maximization limit of the firm, it is extremely important to establish an equilibrium output that maximizes profit.

The most profitable equilibrium϶ᴛᴏ such a position of the company, at which the volume of goods offered is determined by the equality of the market price to marginal cost and marginal revenue:

The most profitable equilibrium under perfect competition is illustrated in Fig. 26.1.

Figure No. 26.1. Equilibrium output of a competitive firm

The firm chooses the volume of output that allows it to extract the maximum profit. With ϶ᴛᴏm, it must be borne in mind that the output that provides the maximum profit does not mean at all that the largest profit is extracted per unit of this product. It follows that it is wrong to use unit profit as a measure of total profit.

In determining profit-maximizing output, it is essential to compare market prices with average costs.

Average cost (AC)- costs per unit of output; equal to the total cost of producing a given quantity of output divided by the quantity of output produced. Distinguish three type of average costs: average gross (total) costs (AC); average fixed costs (AFC); average variable cost (AVC)

The ratio of market price and average production costs can have several options:

The firm, as a rule, produces such a volume of products at which gross income exceeds gross costs. With the growth of production, gross costs increase, since an increase in production requires more resources. However, the degree of increase in gross costs varies depending on the efficiency of the firm.

Cost data reflect the operation of the law of diminishing returns. After a while, however, gross costs begin to increase at an ever-increasing rate due to the inefficiency of overusing the firm's equipment.

Consider what happens with successive changes in production volumes, i.e. with the release of one, two, three, etc. units of goods (see Table 1).

Table 1

It is known that with an increase in production per unit of output, both gross income and gross costs increase. This increase is represented by marginal revenue (MR) and marginal cost (MC). If marginal revenue is greater than marginal cost (MR>MC), then each unit produced adds more to gross revenue than it adds to gross cost. In this case, the difference between gross revenue and gross costs (TR-TC), i.e. profit increases. Conversely, if marginal cost is greater than marginal revenue, then profit decreases. Therefore, the maximum profit is achieved when the marginal cost is equal to the marginal revenue (MC = MR).

In the initial stages of production, when the volume of output is still relatively small, marginal revenue, as a rule, exceeds marginal cost. Therefore, within this volume of production, the firm will increase profits. Therefore, every unit of output whose marginal revenue exceeds its marginal cost should be produced. In this case, on each such unit of output, the firm receives more income from its sale than it adds to the costs of producing this unit.

But in the later stages of production, when output is relatively large, any rising marginal cost will exceed marginal revenue. This means that in the interests of maximizing profits, the firm will have to avoid further increase in production, because. each additional unit of output will add more to costs than to revenues. Therefore, such a unit of production will not pay off.

Separating these two intervals of production (when the increase in profit ends and its decrease begins) will be a special point at which marginal revenue equals marginal cost. This point is the key to the rule that determines the volume of production. According to the principle of profit maximization, the "MR=MC Rule" is an accurate guideline for all firms in any market.

Marginal revenue equal marginal cost rule (MR=MC) means that a firm will maximize profits (or minimize losses) if it expands production to the point where marginal revenue equals marginal cost.

For a purely competitive market, the profit maximization rule has the following form: P=MR=MC. Price equals marginal revenue and marginal cost, which is a special case of the MR=MC rule. The point of optimal profit is where the marginal revenue and marginal cost curves intersect (see Fig. 4).

To consider the MR=MC rule, we will use a conditional example (see Table 1), which shows the dynamics of various types of costs of the company with a consistent increase in its output from 0 to 10. The last three columns of the table calculate the profit (or loss) of the company with possible volumes production and different price levels.

At a price of 10 monetary units, the most profitable production will be the production of 9 units of output. In this case, gross income (TR) will be equal to 90 monetary units, gross costs (TC) will be 39 monetary units, and profit will be 51 monetary units (90-39), i.e. will reach its maximum. At the same time, it must be borne in mind that the firm seeks to maximize its total profit, and not profit per unit of output. The highest profit per unit of production will be in our example when producing 7 units of production. In this case, the price exceeds the average gross costs by the maximum value - 6.58 monetary units (10-3.42). But by producing only 7 units, the firm would forfeit the production of two additional units of output, which would contribute to an increase in total profit. A firm will readily accept a lower unit profit if it more than compensates for the lower unit profit as a result of additional units sold. Having produced two additional units of output (increasing output from 7 to 9 units), the firm in this case gains more than it loses: it will increase profits by 5 units (51-46), and costs by only 0.91 monetary units (4. 33-3.42).

The optimal volume of output (9 units) can be determined immediately by comparing the marginal cost (MC) with the price of a unit of output (according to the profit maximization rule for a firm - a perfect competitor MC = P). In our example, the optimal volume of production will be the one at which the marginal cost (MC = 9 monetary units) is closest to the price of the product (10 monetary units), but does not exceed it.

At a price equal to 3 monetary units, the firm will incur losses at any level of production. However, if it immediately ceases its activities, it will still incur losses in the amount of fixed costs (10 den. units). The firm can minimize losses (bring them up to 2.8 monetary units) with output equal to 6 units. With this volume of production, it will receive a gross income of 18 den. units (3*6). This will allow her to fully cover variable costs (10.8 units), as well as most of the fixed costs (7.2 den out of 10 den. units). Thus, the profit maximization principle (MR=MC=P) is at the same time the loss minimization principle.

Perfect competition as an extreme manifestation of imperfect competition

We have applied the MC and MR rule to profit-maximizing monopolists, but it is not only true in this case. The MC = MR rule is also suitable for a profit-maximizing subject of perfect competition. This can be proven.

1. What is MR for a subject of perfect competition? For the subject of perfect competition, the sale of additional units of production will never cause a price decrease, and the "loss of income from reducing the price of all previous ones" is equal to zero. Price and marginal revenue are equal.

On the chart above, at point E, where MC crosses MR, is the equilibrium position of maximum profit. Any deviation from this point will result in the loss of some profit. The equilibrium price corresponds to point G, which is higher than E; since the price of P is greater than MC, the profit maximized is positive. (Explain why the shaded rectangle represents gross margin. Why do the shaded triangles to the right and left of E indicate a decline in gross margin, which is the result of a deviation from MR = MC?)

In the chart below, profit maximization is shown using charts of general values, not marginal values. Gross profit (TR) is the vertical distance from TC to TR. TE reaches its maximum when the slope of the tangent to it is zero. At the profit maximization point, the total revenue and total cost curves have parallel tangents, MR = MC.

In conditions of perfect competition, the price is equal to the average income and marginal revenue (P = MR = AR). The demand curve (dd) and the perfectly competitive MR curve are straight horizontal lines that coincide.

2. MR = P = MC for the subject of perfect competition. The rule of profit maximization by monopolists is also suitable for subjects of perfect competition, but the results are somewhat different. According to economic logic, profit is maximized when MC = MR. However, based on the first conclusion, for the subject of perfect competition MR = P. Therefore, the equality MR = MC, the profit maximization condition, becomes a special case of P = MC, which we derived from the above rule for the subject of perfect competition.

Since the subject of perfect competition can sell the desired amount of output at the market price, MR = P = MC at the profit-maximizing level of production.

Slightly changing Fig. 9.4 (graph above), we can see this clearly. If the graph is considered from the point of view of perfect competition, then the DD curve should be a horizontal straight line at the level of the market price and coincide with the MR curve. The profit-maximizing intersection MR = MC, in turn, must coincide with P = MC We have a clear proof that the general profit maximization rule applies to both perfect and imperfect competition.