Marginal resource product in monetary terms. Marginal product in monetary terms What is called marginal product in monetary terms
11.3. Profit maximization when using an economic resource
Let's consider a certain firm "Orion", which produces goods X using resource A. As stated, operating in any market structure, the firm maximizes profit by releasing such a volume of production at which its marginal revenue equals marginal cost: MC = MR. Since Orion produces good X using resource A, it is logical to assume that the firm will hire this resource until the marginal revenue received by adding an additional unit of the resource equals the marginal cost associated with hiring that unit of the resource. . Let's pay attention to the following: the categories of marginal revenue (MR) and marginal cost (MC) were defined as changes, respectively, in total revenue (TR) and total cost (TC) associated with the production and sale of an additional unit of goods. Since we are interested in the change in TR and TC associated with hiring an additional unit of resource, we need to introduce two new terms:
monetary marginal product (MRP)- change in the total revenue of firms due to the sale of units of goods produced using an additional unit of the resource:
marginal resource cost (MRC)- change in the total production costs associated with the attraction of an additional unit of the resource:
It can be proved that the condition for profit maximization by a firm is the use of such an amount of a resource that satisfies the condition:
If the firm is not able to influence the prices of resources, i.e. buys resources in a perfectly competitive factor market, then the MRC values will be the same for all hired units of the resource and will amount to the price of a unit of the resource P a . Profit maximization in this case is achieved if P a = MRP.
This means that at any price of the resource P a, the firm can determine the amount of the resource used, i.e. QD of the resource under which the condition is fulfilled: P a = MRP. Then the firm can find a correspondence between the price of the resource P a and QD of the resource or determine the demand for the resource. The resource demand curve is the MRP curve and the supply curve is the MRC curve.
In the long run, when all resources are variable, by producing any amount of output using several resources, say A and B (for example, labor and capital), the firm can minimize the cost per unit of output if the condition
where MPC and MPL are the marginal products of capital and labor;
PC and PL are unit prices of capital and labor.
Equality (8) allows you to find the ratio of resources that provide the company with minimal costs for a given volume of output, but it does not guarantee that in this case the company receives the maximum possible profit. It was proved above that using one resource, say A, the firm maximizes profit when the value of the marginal product in monetary terms is equal to the marginal cost of the resource:
Using only two resources, such as labor and capital, a firm maximizes profit when each resource satisfies this rule, i.e. MRP L=MRC L And MRP C = MRC C . Then, in a generalized form, the profit maximization condition when using two resources can be represented as:
If the firm is not able to influence the prices of resources, then MRC equals the price of the resource and equality (9) takes the form:
Note that, in contrast to equality (8), where a proportional ratio of MP and P is assumed (i.e., the firm can minimize costs if MP L / P L = MP C / P C = 3), the profit maximization condition means that the value of the MRP of the resource is equal to the marginal cost of the resource (resource price) and MRP L / P L =MRP C / P C = 1.
(Materials are given on the basis of: V.F. Maksimova, L.V. Goryainova. Microeconomics. Training and metodology complex. - M.: Ed. center EAOI, 2008. ISBN 978-5-374-00064-1)
The costs of production discussed above are the costs of resources acquired by firms in resource markets. In these markets, the same laws of supply and demand operate, the same mechanism of market pricing. However, resource markets, to a greater extent than markets for final products, are influenced by non-economic factors - the state, trade unions, etc. public organizations(the "green" movement, etc.).
The prices of resources that are formed in the respective markets determine:
Incomes of resource owners (for a buyer, price is an expense, an expense; for a seller, it is income);
Allocation of resources (obviously, the more expensive a resource, the more efficiently it should be used; thus, resource prices contribute to the distribution of resources between industries and firms);
The level of production costs of the firm, which, with this technology, entirely depend on the prices of resources.
In the resource market, sellers are households that sell to businesses their primary resources - work, entrepreneurial ability, land, capital and firms that sell to each other so-called intermediate products - goods necessary for the production of other goods (wood, metal, equipment, etc.). Firms are 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 goods in the production of which certain resources are used, i.e. demand for resources 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 resource productivity, measured, recall, by the marginal product ( MR). If the purchase of a machine gives a greater increase in output than the hiring of one worker, then obviously the firm, other things being equal, will prefer to buy the machine.
Given these circumstances, each firm, presenting a demand for resources, compares the income that it will receive from the acquisition of this resource with the costs of acquiring this resource, i.e. guided by the rule:
MRP=M.R.C.,
MRP- marginal profitability of the resource;
MRC- marginal resource cost.
Marginal yield of a resource or the marginal product of a resource in terms of money characterizes the increase in total income as a result of the use of each additional unit of the input resource. By acquiring a unit of resource and using it in production, the firm will increase its output by the value 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.
Marginal resource cost characterize the increase in production costs in connection with the acquisition of an additional unit of resource. In conditions perfect competition this cost increase equal to the price resource.
Assume that a firm with a given amount of capital ( C) can expand output ( TR), increasing the number of workers ( L) (Table 8.1).
Table 8.1
|
Number of workers (L ) |
Total product, unit (TR) |
Ultimate product, unit (MR) |
Product price, den. units ( R) |
Ultimate product in monetary expression, monetary unit ( MRP) |
By hiring each subsequent worker, the firm increases its income, but due to the law of diminishing returns, at a slower pace. The first worker increased the firm's income by 60 den. units, the second - for 50 den. units, the third - for 46 den. units etc. Suppose the salary is 30 den. units, then the firm will hire three workers, since each of them will generate income, more, than his salary. The fourth and subsequent workers would bring losses to the firm, since their wages would exceed the income that they could bring.
Thus, the firm determines the demand for separate resource, but many resources are used in production and the final return depends not only on the productivity of this resource, but also on the proportions in which the resources are combined. After all, the productivity of a worker depends not only on his skills, skills, qualifications, but also on how technically equipped his work is. This raises the question of what should be the ratio of different resources or what their ratio will optimal, those. provides the firm with the lowest cost of producing a given quantity of output.
Firm achieve the lowest cost production of a certain volume of output, if the demand for resources obeys the rule: the ratio of the marginal product of one resource to the price of this resource is equal to the ratio of the marginal product of another resource to the price of this resource, etc., i.e.
|
|
MP L MP C
MRL And MRWITH - respectively, marginal product of labor and marginal product of capital;
RL And RWITH - respectively, the price of labor and the price of capital;
If this condition is met, the firm is in balance state, those. the return of all factors is the same and no redistribution of funds between resources will reduce production costs.
There are many levels of output at which production costs are minimal, but there are only one the amount of production that maximizes profit. What combination of resources will maximize profits?
The profit maximization rule is a further development of the cost minimization rule. The firm will provide maximum profit, if the ratio of the marginal profitability of one resource to the price of this resource will be equal to the ratio of the marginal profitability of another resource to the price of this resource and will be equal to one, i.e.:
|
|
|
MRP L MRP C
Or in other words, A firm maximizes profit if it uses a ratio of resources such that the marginal return on each resource is equal to its price.
1. Demand for resources
2. Labor market
3. Capital market. Loan interest
4. Land Market
7.1 Demand for resources
In this topic, we will consider another type of market - the market for factors of production (resource market). Demand in resource markets is formed under the influence of markets for consumer goods and services, i.e. the demand for resources is derived from the demand for consumer goods. This means that it depends on:
1) on the productivity of the resource when creating a product;
2) from the market value or price of the goods produced with the help of this resource.
Growth in total income ( TR) resulting from the use of an additional unit of resource is called marginal product in monetary terms (MRP) (the same is the marginal profitability of the resource).
MRP = MR MP,
Where MRP- the marginal product of the factor of production in monetary terms;
MR- marginal income;
MP is the marginal product of a factor of production.
The increase in costs resulting from the use of an additional unit of a resource is called marginal cost per resource (MRC).
To maximize profit, the producer must use additional (marginal) units of any resource as long as each additional unit of the resource gives an increase in total income that exceeds the increase in total costs. Thus, the resource usage rule can be expressed by the equality:
MRP = MRC
We can specify this rule for each type of resource. Suppose that a competitive firm uses one variable factor of production - labor, which it also acquires in a competitive market. Under perfect competition, marginal revenue equals price:
MR=P, Then MRP L = P MP L
Table 7.1- Production results
|
resource |
product |
Ultimate |
product |
Ultimate product in monetary expression |
|
If the firm maximizes profit, then it hires workers until the marginal revenue from the use of an additional unit of the factor (labor) is equal to the costs associated with its purchase, i.e. MRC. In a competitive market, all units of a resource (labor) can be purchased at a constant price W(wage rate), which means that each newly hired worker will add his salary to the costs, i.e. W = MRC L. In other words, the firm will hire workers until the marginal product of labor in monetary terms is equal to the rate wages. That is, up to the point where MRP L = W.
In this case MRP curve is the labor demand curve, since each point of this curve shows how many workers the firm will hire at each possible wage level (Fig. 7.1).
Rice. 7.1- demand for labor
The labor demand curve MRP is downward sloping for both a pure competitive firm and a pure competitive firm. imperfect competition. However, if competitive firm MRP decreases only as a result of the law of diminishing returns (MRP \u003d MR MP and MP decreases), then the MRP of a company in conditions of imperfect competition also decreases due to the need to reduce the price of the product with an increase in output (i.e., not only MP, but also MR decreases) . Therefore, on the graph, the labor demand curve of a firm under imperfect competition will be steeper than the labor demand curve of a firm under pure competition (Fig. 7.2). This means that at any wage rate, an imperfectly competitive firm will hire (ceteris paribus) fewer workers.
What can change the demand for a resource? The demand curve for a resource will shift to the right when the marginal product in monetary terms changes if MRP increases; to the left if MRP decreases. MRP will change when changing:
- Demand for the product. An increase in demand for a product leads to an increase in prices and MRP, decrease in demand - reduces MRP.
– resource performance. Any change that increases the marginal product ( MP) increase the demand for the resource.
–
prices for other resources. If resources can replace each other in the production process (for example, labor and capital), then when prices change, one of them has a substitution effect and an output (volume) effect. For example, if the price of capital falls, then the use of labor in the production process will decrease (labor is replaced by capital) and the demand for labor will decrease ( substitution effect). At the same time, the use of a cheaper resource (capital) will lead to lower production costs, which will increase output. With an increase in output, the demand for all resources, both capital and labor, increases ( output effect). Since these effects work in the opposite direction, the total change in the demand for a resource will depend on relative magnitude these effects. If the substitution effect is greater than the output effect, then with a decrease in the price of a substitute resource (capital), the demand for another resource (labor) will decrease. If the substitution effect is less than the output effect, then a decrease in the price of one resource will increase the demand for another.
Rice. 7.2- Demand for labor under perfect conditions (D 1)
and imperfect competition (D 2)
If resources are used in the production process together, that is, they complement each other, for example, a car is a driver, then a decrease in the price of one of them (car) will lead to an increase in demand for another (labor).
Least Cost Rule
Earlier we found out that producer equilibrium is achieved when the last monetary unit spent on each resource gives the same return - the same marginal product, that is, the condition is met:
|
MP L |
MP K |
|
This rule applies to any number of factors of production (resources).
|
MP 1 |
MP 2 |
MP n |
||||
|
P 1 |
P 2 |
P n |
If the return of all factors is the same, the task of their redistribution disappears, since there are no resources that bring more income than others. The manufacturer is in a state of equilibrium. In this position, the optimal combination of factors of production is achieved, ensuring the maximization of output. The rule of least cost concerns not only the set of all resources, but also the use of the same resource in different production processes.
Profit maximization rule
To maximize profit, the condition must be met MRP = MRC.
Since, under perfect competition, the prices of goods and the prices of resources are given values independent of a given producer, the marginal productivity of any resource in monetary terms will change in the same way as the marginal productivity in physical (“physical”) terms, since in order to get the first, it is enough multiply the second by the constant price. Thus, the resource will be used in production as long as its marginal productivity in monetary terms is not lower than its price. MRP 1 ≥ P 1 . (This means that the price of a resource measures its marginal productivity)
The profit maximization rule in competitive markets means that the monetary marginal products of all factors of production are equal to their prices, or that each resource is used until its monetary marginal product equals its price.
This rule can be written like this:
|
MRP 1 |
MRP 2 |
MRP n |
MRP i =P i |
|||||||
|
P 1 |
P 2 |
P n |
The profit maximization rule is a further development of the cost minimization rule. This means that in order to maximize profits, the necessary condition is to minimize costs.
There is no single resource market, but there is a set of interrelated markets - the labor market, the capital market, the land market, the entrepreneurial ability market.
Marginal product of labor in monetary terms
|
Quantity |
Total product of labor in physical units (Q) |
Marginal product of labor in physical units (MP L) |
Marginal product of labor in den units, (MP L P) |
General costs (TC), rub. |
marginal cost, |
|
(13-9)/(3-2)= 4 | |||||
|
(16-13)/(4-3)= 3 |
3∙100=300 | ||||
|
(18-16)/(5-4)= 2 | |||||
|
(19-18)/(6-5)= 1 |
The firm will hire 4 workers. Let's justify our decision.
The use of 3 workers will give a profit increase of 400 - 300 \u003d 100 rubles. In the case of hiring 4 workers, the marginal product in the monetary form of the 4th worker (300 rubles) exactly corresponds to the amount of his earnings, i.e. MRP L = MRC L . Hiring the 5th is unprofitable, because. the marginal product in cash is 200 rubles, and the marginal cost associated with hiring the 5th worker is 300 rubles (the fifth worker will have to pay 300 rubles), in this case the company will incur losses in the amount of 300 - 200 \u003d 100 rubles. Therefore, if MRP > MRC, then the firm, in order to maximize profits, should increase the amount of the variable factor, and vice versa.
And only in case MRP = MRCThe firm will earn the maximum profit.
For example, consider the equilibrium situation of a firm presenting a demand for labor under perfect competition (Fig. 8.3).
Rice. 8.3. Equilibrium in the labor market
The firm, hiring an additional worker, commensurates the amount of revenue from the use of his labor with the cost of hiring an additional worker ( w). Negative slope MRP L is associated with the law of diminishing marginal productivity of the factor, its location is determined by the level of marginal productivity of the factor ( MR L) and the price of manufactured products ( R). Dot E is the equilibrium point of the firm in the factor market, since right in it MRP L =w e. This means that at the wage level (w e), the firm should hire L e workers. Thus, IfMRP L = w e provide an optimal level of employment.
When the number of workers is less than Le, When MRP L > w e the firm should increase the number of workers. When the number of workers is greater than Le, When MRP L < w e, the firm should reduce their number.
Any firm that operates on two variable, partially interchangeable factors faces the problem of choosing the combination of inputs for each given output, and it seeks to minimize costs for each given output.
To identify all possible combinations of factors in the production of a given volume of products, we construct an isoquant and an isocost.
isoquant - this is a curve, any point on which shows different combinations of two variable factors that provide the same output (Fig. 8.4).
All possible technologically efficient combinations of two factors corresponding to a certain volume of production are on the curve. For example, the release of 90 units of production (Table 12.1) can be obtained with the following combinations of labor and capital: 3 units. TO and 4 units. L; 4 units TO and 2 units. L. All combinations will be on the isoquant with a volume of 90 units. But if a less efficient technology is used, then the use of 3 units. TO and 4 units. L will give a production volume equal, for example, to 85 units. products.
Other combinations of two factors, for example, 6 units. TO and 4 units. L; 2 units TO and 6 units . L, will give an output equal to 106 units. products, and will be on the isoquant with the corresponding output located above this curve (Fig. 8.5).
Isoquants never intersect. Each isoquant corresponds to a certain amount of output, the farther the isoquant from the origin, the more output it will provide.
An isoquant is a graphical form of expression production function. Therefore, it has the same characteristics as the production function:
1) isoquant shows the maximum output for each individual combination of factors;
2) isoquants are concave and become flatter as one moves from top to bottom along them. As we move down the isoquant, more and more units of labor are required to replace each unit of capital, resulting in a decrease in the marginal productivity of labor and an increase in the marginal productivity of capital;
3) isoquants have a negative slope, since in order to maintain the same volume of output with a decrease in the use of one factor, it is necessary to increase the use of another.
For example, the change in capital to the change in labor will look like this:
MRTS KL = - K/ L.
By reducing the use of one factor, such as capital ( K), the firm reduces output by Q = MP K ·(- K). But in order to stay on the same isoquant, the decrease in the amount of capital used must be compensated by the increase in labor used ( L) on Q = MP L · L.
Therefore, in order for the output to remain unchanged, the equality must hold:
MP L · L + MP K · K=0
or MP L · L=MP K ·(- K).
It follows that,
MP L / MP K = - K / L = MRTS KL .
Thus, the marginal rate of technological substitution of factors of production is equal to the inverse ratio of their marginal products (productivity).
As you move down the curve MRTS KL decreases (therefore, the curve has a convex shape towards the origin). This is explained by the fact that as capital is replaced by labor (reduction of the factor TO and increasing the amount of factor L) the marginal product of capital ( MR TO) increases, and the marginal product of labor ( MR L) decreases (the numerator decreases and the denominator increases). Consequently, the marginal rate of technological replacement of capital by labor decreases. And vice versa.
On the other hand, equality MP L / MP K = - K / L says that at any point of the isoquant, the marginal rate of substitution of one resource for another is equal to the slope of the tangent to the point lying on the isoquant . MRTS KL is the slope of the isoquant.
Isoquants have a different form depending on the degree of interchangeability of resources (Fig. 8.6).
a) Absolutely b) Complimentary c) Partially
interchangeable (mutually complementary) interchangeable
Rice. 8.6. Isoquant forms
Isoquants, in the form of straight lines (Fig. 8.6 a), characterize the ideal interchangeability of factors, that is, one factor can be completely replaced by another. In this case, production can be carried out even with the help of a single factor. For example, the sale of drinks can be carried out by sellers, or maybe by vending machines. In this case, the marginal rate of technological substitution is constant at all points of the isoquant ( MRTS KL = cons’ t). Then the production function looks like:
Q= α ∙K+β ∙ L.
Isoquants in the form of a right angle (Fig. 8.6 b) reflect the patterns of production with fixed proportions of factors. In this case, the production technology is such that the factors used complement each other and substitution between them is impossible ( MRTS KL =0 ). In order to carry out the production process, both factors must be applied in the same strictly defined proportion, for example, 1 car and 2 drivers (1 unit of production). TO and 2 units. L). A prerequisite for the transition to a new isoquant is not only an increase in two factors, but also compliance with a given proportion in the use of resources. If there is an increase in one factor without changing the other, then the transition is impossible. For example, a combination of 3 cars and 2 drivers makes no economic sense, just like a combination of 1 car and 6 drivers. The transition to a higher isoquant in this case is possible with a combination of 3 cars and 6 drivers.
In this case of complementary factors, the production function has the form (the "input-output" formula or V.V. Leontiev's formula):
Q= f(K, L) = min{ α TO,βL} .
This means that the volume of output will be equal to the minimum of the values that will be obtained by substituting the quantitative values of variable factors into the function.
Let α=3, β= 2, TO=1, L=2, then the output will be equal to 3, since Q= min(3(1),2(2)). Then the volume will be equal to 3 and 4.
In the case of partially interchangeable factors (Fig. 8.6 c), production can be carried out with the obligatory use of two factors. Their combinations can be different depending on the given production function (Cobb-Douglas formula):
Q=A∙K α ∙ L β .
A firm operating with two variable factors faces the problem of choosing the optimal combination of inputs for each given output. A profit maximizing firm will seek to choose the cheapest combination of inputs. Thus, the problem is reduced to minimizing the costs of the firm for each given volume of production.
Just as the same amount of output can be obtained with different combinations of factors, different combinations of them can give the same level of costs. The line that reflects different combinations of factors of production that give equal total costs is calledisocostal (Fig. 8.7).
Let's graph the total costs:
TS = R TO ∙K+R L ∙ L,
Where TS- total costs equal to the sum of fixed and variable; R TO- the price of a unit of capital; TO- amount of capital; R L- the price of a unit of labor; L - the amount of labor.
Rice. 8.7. Isocost
The isocosta is constructed as follows. If we assume that everything is spent only on the acquisition of capital, then it is possible to acquire the maximum TS/R TO units If everything is spent only on the acquisition of labor, then we can acquire the maximum TS/R L units By connecting these boundary points, we get the isocost (Fig. 8.7).
Any point on the isocost shows a combination of two factors in which the total costs (total costs) for their acquisition are equal. The isocost is described by the equation:
TC= P TO ∙K+R L ∙ L,
.
The angle of inclination of the isocost is equal to the marginal rate of technological substitution:
.
Thus, the slope of the isocost is equal to the ratio of the prices of the factors used, multiplied by (-1). If a firm increases the amount of one factor, then it must reduce the use of another. In order to keep the total cost of acquiring factors unchanged, the following condition must be met:
- K / L = P L / P K .
Because the, The isocost is both an equal cost line and a firm's budget constraint line., then the equation can look like:
B= P TO ∙K+R L ∙ L,
Where IN- the company's budget for the purchase of factors; R TO- the price of a unit of capital; TO - amount of capital; R L – unit price of labor; L- the amount of labor.
For example, the company's budget for the purchase of factors is 1000 rubles, and the price of 1 unit of capital is 500 rubles, and the price of 1 unit of labor is 250 rubles. In this case, the firm can purchase 2 units of capital or 4 units of labor (Figure 8.8).
A change in the size of the budget causes a shift in the isocost to the left (decreased) or to the right (increased) (Fig. 8.9 a). A change in the price of factors of production leads to a change in the slope of the isocost (Fig. 8.9 b). But cases of simultaneous changes in both the budget and prices for factors of production are possible.
The task of the entrepreneur is to choose such a combination of factors that ensures the production of the required quantity of products at the lowest cost. The optimal ratio of factors will be when the combination of these resources lies on the isocost, and the slope of the isocost is equal to the slope of the isoquant, i.e.
.
This equality says that the minimum costs are achieved when the cost of an additional unit of output does not change from the use of any additional factors.
To determine the optimal combination, let's overlay the isoquant map on the isocost (Fig. 8.10). Isocost with budget constraints IN 1 (or costs WITH 1 ) does not allow reaching the required output, since it does not have a point of contact with the isoquant. We see the intersection of the isocost with isoquants at points A, IN And D. points IN And D indicate excessively high costs ( IN 3 ) to achieve a given output volume Q. Dot A is optimal, since it is this combination of factors that allows you to produce volume Q at a lower cost ( IN 2 ).
In order to increase or decrease the volume of production, the firm must change the ratio of factors until the marginal rate of substitution of factors ( MRTS KL) will not be equal to the slope of the isocost ( P L /P K). From this follow the following conclusions:
1) the factor of production is used until its marginal productivity, expressed in monetary units, becomes equal to its market price, which is the limiting limit of the factor's application;
2) the optimal combination of a factor is achieved when the ratio of the marginal productivity of the factors is equal to the ratio of their market prices;
3) the ratio of prices and marginal productivity of factors of production determines the demand for each of them.
In the short run, if the price of any factor rises, then the firm will reduce its use and increase the cheaper one. However, a change in the use of factors of production leads to a change in production costs. And any restriction on the use of any factor will lead to an increase in costs and will not allow the company to achieve the optimal combination of factors. However, in the long run, the firm has more opportunities to combine factors for each given output, since the costs in the long run are lower than the costs in the short run.
Having determined the optimal ratio of factors for the volume Q, you can do the same for volumes Q 1 , Q 2 etc. As a result, we get a certain map of cost-optimal options for the implementation of production (Fig. 8.11). Combination of factors at a point A will give the least cost for volume Q 1 , at the point IN with volume Q 2 , at the point WITH with volume Q 3 . Connecting all points of optima for different volumes of production ( A, IN, WITH) we get a curve called growth trajectory.
When making decisions about changing production volumes, the firm will move along this curve.
The direction of the trajectory depends on the ratio of factor prices and their marginal productivity. For most producers, a shift towards capital due to a shift to more capital-intensive technologies is most likely (Figure 8.12a). If the technology requires a constant ratio of factors, then a linear development trajectory will be observed (Fig. 8.12 b). If in rare cases the use of a large amount of labor is required, then a downward trajectory of development takes place (Fig. 8.12 c).
As mentioned above, at the point of contact, the slopes of the isoquant and isocost are equal. The slope of the isocost is P L /P K, and the isoquants are MRTS KL . .
MRTS KL = MP L / MP K = - K / L,
but - K/L = P L / P K . Then MP L / MP K = P L /P K, that is:
-cost minimization rule.
a) Capital-intensive b) Mixed c) Labor-intensive
Rice. 8.12. Various forms of technology development trajectory
From the point of view of rational economic behavior, this means that a more expensive factor of production is replaced by a cheaper one. For example, capital is more expensive than labor ( MP L / P L MP K / P K), then the firm minimizes costs by replacing capital with labor. If labor is more valuable than capital MP L / P L MP K / P K), labor is replaced by capital.
Let's illustrate this simple example. Let the firm use 4 units. labor and 9 units. capital. The price of labor ( P L) = 100 rubles, the price of capital ( P K) = 100 rubles. Marginal product of the 4th unit. labor ( MP L) = 12, and the 9th unit. capital MP K = 6.
According to the cost minimization rule, the equality must hold:
MP L / P L = MP K / P K .
In our case, 12/100 6/100, 0.12 0.06.
This is not equal. Consequently, this combination is not optimal, since the last ruble spent on acquiring an additional unit of labor gives an increase in output of 0.12 units, and the last ruble spent on acquiring an additional unit of capital gives an increase in output of only 0.06 units. In this situation, the firm should replace a relatively expensive factor (capital) with a relatively cheap factor (labor), that is, increase the amount of labor and decrease the amount of capital. This substitution is carried out until the ratios of marginal product to price for the two factors are equal. For example, for the 6th unit. labor and the 7th unit. capital, the marginal products will be equal to ( MP L =10, MP K = 10).
Then 10/100 = 10/100 - in this case, the firm minimizes costs.
Cost minimization is a necessary but not sufficient condition for profit maximization. The difference between cost minimization and profit maximization is as follows. Upon reaching the optimal combination of factors for any volume of output, the prices of factors and their marginal productivity are accepted. When formulating the conditions for maximizing profits, the marginal product of the factor in monetary terms, which reflects the demand for products produced with their help, is also taken into account. This is due to the derivative nature of the demand for factors.
The firm's profit is maximized if MRP L = MRC L .
Under conditions of perfect competition, this rule is formulated as follows: profit maximization is achieved when the marginal product of a factor in monetary terms is equal to its price. If the firm uses two variable factors - labor and capital, then profit maximization will be ensured at such a volume of production when MRP L = P L And MRP K = P K ,
or MP L / P L= 1 and MP K / P K = 1.
A F E N I I (marginal revenue product, MRP) - additional
proceeds from the sale of additional volume of products received
when resource usage increases per unit (279)
ENTREPRENEURSHIP, ENTREPRENEURSHIP
ABILITY (entrepreneurial ability), CONTROL (managerial
skills)- the ability to rationally and most effectively
combine (use) resources for the production of economic
REPRESENTATIVE DEMOCRACY (representative democracy)
political system in which citizens
periodically elect representatives to elected bodies of power.
PROFIT (profit) - is defined as the difference between the total
revenue (total revenue) and total costs (total
cost): 7i = TR - TS. (192)
PROBLEM (from the Greek "task", "task") - clearly articulated
a question or set of questions that arose in the process
knowledge. (18)
THE PROBLEM OF THE FREE RIDER, THE "HARE" (free rider problem)
The problem with consumer desire
to do without extra payments, having received benefits from a purely public
goods (which are provided to all consumers regardless
whether they pay for it or not). (431)
"FAILS" (FIASCO) OF STATES (GOVERNMENTS)
(government failures)- cases when the state (government)
unable to ensure efficient distribution and
use of public resources (464)
"FAILS" (FIASCO) OF THE MARKET (market failures) - situations
when the mechanism of competitive markets does not lead to
to maximize social utility. (432)
DERIVATED DEMAND (derived demand) - resource demand,
dependent on demand final products produced
based on these resources (279)
PRODUCTION FUNCTION (production function)
firm producing a certain product Q - shows the maxi-
548 Concise Dictionary economic terms
low possible volume of output of this product when using
all possible combinations of factors of production: Q=f(F1,F2,...Fn).
A simplified version of the production function - dependency
goods Q from labor (L) and capital (K): Q = f(L, K). (46, 158)
PRODUCTION CAPABILITIES (production capacity)
Society's ability to produce economic
blessings in full and efficient use all available
resources at a given level of technology development. (48)
AGAINST RISK (risk aversion) - a person who
given the expected income will prefer a certain, guaranteed
the result of a series of uncertain, risky outcomes. (359)
TRADE UNION (trade union) - an association of employees with
the right to negotiate with the entrepreneur from
name and on behalf of its members. (259)
PERCENT (interest) - see Loan interest.
DIRECT DEMOCRACY (direct democracy)- political
system in which every citizen has the right to
question. (450)
BERTRAND EQUILIBRIUM (Bertrand equilibrium) - describes
a market situation in which, under the conditions of a duopoly, firms
compete for the price of a good for a given output of each
firm Equilibrium stability is achieved when the price
turns out to be equal to marginal costs, i.e., competitive
equilibrium. (253)
CURNOUGH EQUILIBRIUM(Cournot equilibrium) achieved
in the market when, in a duopoly, each firm, acting
independently, chooses such an optimal volume of production,
what the other firm expects from it. Cournot equilibrium
arises as the point of intersection of the response curves of two firms.
BALANCE OF THE MANUFACTURER- marginal norm of technical
substitution of factors, which is equal to the ratio of prices
these factors. (168)
STACKELBERGER EQUILIBRIUM (Stackelberg equilibrium)
Describes a duopoly with an unequal distribution of the market
power between firms, so that one of them behaves like
leader (either by price, or by volume, or by volume and
to another at the same time), while the other implements the strategy
adaptations, adjusting their behavior depending on
from the choice made by the first firm. (253)
EQUILIBRIUM PRICE (equilibrium price) - balancing price
supply and demand as a result of competitive
RISK ALLOCATION (risk spreading) is a method for
in which the risk of possible harm is divided among the participants in such a way
so that the possible losses of each are relatively small.
Concise Dictionary of Economic Terms 549
RATIONAL IGNORANCE (rational disregard) - situation,
when voters do not see the benefit of participating in political
process. (457)
REAL WAGE (real wage rate) - purchasing
wage capacity, expressed in quantity
goods and services that can be purchased with the amount received.
REAL INTEREST RATE (real rate of interest) -
inflation-adjusted interest rate, i.e. expressed
at constant prices. (328)
ECONOMIC RESOURCES (economic resources), FACTORS
PRODUCTION- necessary for the production of economic
good elements. The main types of resources are:
labor, land, capital, entrepreneurial ability. Often to
they also add information. (46)
RISK ASSETS (risk assets) - assets, the income from which
partly depends on the case. (401)
ROWLESAN APPROACH (Rawls" view) - special variety
egalitarianism, developed in the writings of the modern philosopher
J. Rawls. According to Rawls, the utility of the least
wealthy members of society. (364)
MARKET (market) - a system of relations in which the relationships of buyers
and sellers are so free that prices for the same
goods tend to level out quickly. (80)
MARKET ECONOMY (market economy) - system based
on private property, freedom of choice and competition,
relies on personal interests, limits the role of government. (60)
SYNTHESIS (from Greek "connection") - a method that
in joining parts into a whole. (17)
RISK-INTENDED (risk preference) - the man, who
for a given expected return, will prefer the risky
result guaranteed result. (391)
MIXED ECONOMY (mixed economy) - type of society
synthesizing elements of market and command economies, in
in which the mechanism of the market is complemented by the vigorous activity of the state.
PERFECT COMPETITION (perfect competition) -
market structure, characterized by the following features:
1) a large number of sellers and buyers of goods; 2) uniformity
products; 3) absolute mobility resource movements,
the absence of barriers to entry and exit from the industry, 4) neither
one economic agent does not have power over prices; 5) complete
awareness of participants about prices and production conditions.
TOTAL INCOME, REVENUE (total revenue, TR) -
the amount of income a firm receives from the sale of a given quantity
550 Concise Dictionary of Economic Terms
where TR (total revenue) - total revenue;
Р (price) - price;
Q (quantity) - torn amount. (193)
TOTAL (TOTAL) PRODUCT (total product, TR) -
factor of production - the volume of goods produced, attributable to
on a certain amount of this factor. (159)
TOTAL DEMAND(aggregate demand)- sum of individual
demand in the market at each price. (85)
SPECULATIVE DEMAND(speculative demand)- demand,
arising in a society with high inflationary expectations,
when the danger of higher prices in the future stimulates additional
consumption (purchase) of goods in the present. (126)
SPECULATION(speculate)- activity, expressed
in purchase for the purpose of resale at more than high price. (398)
SPECIFIC RESOURCES(specific resources)- resources,
the value of which is higher inside the firm than outside it. (185)
COMPARISON- a method that determines similarities and differences
phenomena and processes. (18)
AVERAGE COSTS (average costs, AC)- costs for
unit of output. (198)
AVERAGE INCOME(average revenue, AR)- income attributable
per unit of goods sold. Under perfect competition
average income is equal to the market price:
AR = = -= P. (193)
AVERAGE PRODUCT(average product, AR)FACTOR OF PRODUCTION
The volume of goods produced per unit
factor used. (159)
PAYBACK PERIOD OF INVESTMENT PROJECT-
indicator of investment efficiency. Equal to the minimum number
periods required for the current value of the flows
net income caught up with the value of investments (net current
value investment project went to zero). How
the lower the payback period, the higher the efficiency of investment
project. (321)
LOAN INTEREST(interest)- price paid to owners
capital for use borrowed money during
a certain period. (319)
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