Introduction 3
1. Basic concepts 3
2. The concept of elasticity of demand and its types 5
3. Elasticity of demand at price 5
3.1. Formula for measuring price elasticity of demand 5
3.2. Types of price elasticity of demand 6
4. Cross price elasticity of demand 7
5. Elasticity factors 10
Conclusion 12
List of information sources 13
Introduction
Elasticity is one of the most important categories of economic science. It was first introduced in economic theory A. Marshall and represents a percentage change in one variable in response to a percentage change in another variable. The concept of elasticity allows us to find out how the market adapts to changes in its factors. It is usually assumed that a company, by increasing the price of its products, has the opportunity to increase revenue from its sales. However, in reality, this does not always happen: a situation is possible when an increase in price will not lead to an increase, but, on the contrary, to a decrease in revenue due to a decrease in demand and a corresponding reduction in sales.
Therefore, the concept of elasticity has great value for manufacturers of goods, because gives an answer to the question of how much the volume of supply and demand will change when the price changes.
1. Basic concepts
Demand– the purchasing power of buyers for a given product at a given price. Demand is characterized by the quantity demanded - the quantity of goods that buyers are willing to purchase at a given price. The word “ready” means that they have the desire (need) and opportunity (availability of the necessary funds) 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 such quantities of goods.
We can consider both individual demand (the demand of a specific buyer) and the general amount of demand (the demand of all buyers present in the market). In economics, we study mainly the general amount of demand, since individual demand highly depends on the personal preferences of the buyer and, as a rule, does not reflect the real picture that has developed in the market. Thus, a specific buyer may not have a need for any product at all (for example, a bicycle), nevertheless, there is a demand for this product in the market as a whole.
As a rule, the demand for a product obeys the law of demand.
The law of demand is a law according to which, when the price of a product increases, the demand for this product decreases, other factors being constant.
The law of demand may have some exceptions. For example, for some prestigious goods, a small increase in price can sometimes lead to an increase in demand, since a higher price compared to analogues creates the illusion in the buyer that this product is of higher quality or fashionable.
The law of demand has a graphical representation generally accepted in economics in the form of a demand graph.
Demand schedule – a graph showing the dependence of the quantity demanded on the price.
Each price value corresponds to its own demand quantity. This relationship can be expressed graphically, in the form of a demand curve (demand line) on a demand graph.
On a demand graph, it is customary to plot price (P) on the abscissa axis, and quantity (Q) on the ordinate axis.
A demand curve is a continuous line on a demand graph in which each price value corresponds to a certain quantity demanded.
The demand line on the chart may look different depending on the product. It is usually depicted as a curve, resembling a hyperbola.
The demand curve is usually depicted only in its central part, without extending the line to areas of too low or too high prices for a product, since such situations are, as a rule, speculative and the study of demand in them is in the nature of assumptions.
2. The concept of elasticity of demand and its types
Elasticity of demand is the degree to which demand changes when price and non-price factors influencing it change.
Elasticity of demand measures the degree to which buyers respond to changes in prices, income levels, or other factors. Calculated through the elasticity coefficient.
There is a distinction between price elasticity of demand and income elasticity of demand.
In relation to what can we define elasticity? For example, regarding price changes. We cannot calculate price changes mathematically, and although many factors influence its changes, it is an absolute value. More informative for economic analysis exactly relative values, because a simple change in the price of a product may not tell us anything, but a change in price relative to the previous price tells us a lot. For example, we understand how significant this price change was. Perhaps the product has significantly increased in price (or depreciated) or, conversely, the price change (increase or decrease) did not seriously affect the original price.
3. Price elasticity of demand
3.1. Formula for measuring price elasticity of demand
Price elasticity of demand is a quantity used to measure the sensitivity of quantity demanded to a change in the price of a product, holding other factors affecting demand constant.
Price elasticity of demand shows the extent to which the consumer responds to price changes.
The price elasticity coefficient is a numerical indicator that reflects the degree of change in the quantity of goods and services demanded in response to changes in their price. Calculated by the formula:
, Where:E(p)– price elasticity of demand;
δQd(%) – percentage change in demand;
δP(%) – percentage change in price.
3.2. Types of price elasticity of demand
There are several types of price elasticity of demand depending on the value of the elasticity coefficient:
E > 1 – elastic demand, if the absolute value of elasticity
ranges from 1 to infinity;
E< 1 – неэластичный спрос, если абсолютное значение эластичности
varies from 0 to 1;
E = 1 – demand with unit elasticity (depends on individual
choice);
E = 0 – completely inelastic demand, if the elasticity of demand is
price is zero;
elasticity equals infinity (under conditions
perfect market).
Perfectly elastic demand means that demand is infinitely elastic and a small change in price causes an infinitely large change in the quantity demanded.
Perfectly inelastic demand is demand whose quantity does not change at all when price changes.
Price elasticity of demand different goods may vary significantly. The demand for basic necessities (food, shoes) is inelastic, since they are necessary for life and, despite the increase in price, it is impossible to refuse their consumption. Luxury goods, on the contrary, have a higher price elasticity.
Products with elastic demand by price:
– Luxury items (jewelry, delicacies)
– Products whose cost is appreciable to family budget(furniture,
Appliances)
– Easily replaceable goods (meat, fruits)
Products with inelastic demand by price:
– Basic necessities (medicines, shoes, electricity)
– Goods whose cost is insignificant for the family budget
(pencils, toothbrushes)
– Hard-to-replace goods (light bulbs, gasoline)
4. Cross price elasticity of demand
Cross price elasticity of demand expresses the relative change in the quantity demanded of one good when the price of another good changes, all other things being equal.
There are three types of cross price elasticity of demand:
– positive;
– negative;
– zero.
Positive cross price elasticity of demand applies to interchangeable goods (substitute goods). For example, butter and margarine are substitute goods; they compete in the market. An increase in the price of margarine, which makes butter cheaper relative to the new price of margarine, causes an increase in demand for butter. As a result of an increase in the demand for oil, the demand curve for it will shift to the right and its price will rise. The greater the substitutability of two goods, the greater the cross-price elasticity of demand.
Negative cross price elasticity of demand refers to complementary goods (related, complementary goods). These are goods that are shared. For example, shoes and shoe polish are complementary goods. An increase in the price of shoes causes a decrease in the demand for them, which, in turn, will reduce the demand for shoe polish. Consequently, with a negative cross elasticity of demand, as the price of one good increases, the consumption of another good decreases. The greater the complementarity of goods, the greater will be the absolute value of the negative cross price elasticity of demand.
Zero cross price elasticity of demand refers to goods that are neither substitutable nor complementary. This type of cross price elasticity of demand shows that consumption of one good is independent of the price of another.
The values of cross price elasticity of demand can vary from “plus infinity” to “minus infinity”.
A given product depends not only on its own price, but also on the prices of other goods. For example, the demand for Zhiguli depends not only on the price of the Zhiguli, but also on the prices of foreign cars of a similar class, spare parts, gasoline, etc.
Cross price elasticity of demand shows by what percentage the demand for a product changes A(d a) when the price of the product changes IN(P b) by 1%.
Formula for calculating the cross elasticity coefficient:
Three cases are possible:
1. If, with an increase (decrease) in the price of a product IN demand for goods A grows (decreases), then such goods are called interchangeable(substitutes).
In this case.
For example, Coca-Cola went up in price by 10%, as a result of which the demand for it decreased, but the demand for Pepsi-Cola increased, say, by 15%. Therefore, the cross elasticity of demand for Pepsi to the price of Coca-Cola is equal to
If Coca-Cola, on the contrary, falls in price (the percentage change in price will be negative), then the demand for Pepsi will fall (the percentage change in demand will be negative). Then both the numerator and denominator will contain numbers with negative signs, but the result will still be positive.
2. If, with an increase (decrease) in the price of a product IN demand for goods A decreases (increases), then such goods are called complementary(complementary).
In this case.
For example, car parts rose in price by 10%, causing demand for cars to fall by 5%. Therefore, the cross elasticity of demand for cars with respect to the price of spare parts is equal to:
In turn, when the price of spare parts becomes cheaper, the demand for cars will increase, but the elasticity of demand for cars with respect to the price of spare parts will remain negative.
3. If, with an increase (decrease) in the price of goods B, the demand for goods A does not change, then such goods are called independent.
In this case .
Let soccer balls become more expensive (cheaper). Most likely, this will not have any impact on the demand for perfume. Therefore, the price of the balls will be zero for perfume.
Under income elasticity of demand refers to changes in demand for a product due to changes in consumer income. If an increase in income leads to an increase in demand for a product, then this product belongs to the “normal” category; if a consumer’s income decreases and the demand for a product increases, then the product belongs to the “inferior” category. For the most part, consumer goods fall into the normal category.
Income elasticity measures indicate whether a given good is categorized as “normal” or “inferior.”
Income elasticity of demand is equal to the ratio of the percentage change in the quantity demanded of a good to the percentage change in income and can be expressed as the following formula:
Where E1D – coefficient of elasticity of demand depending on income;
Q0 and Q1 – the amount of demand before and after a change in income;
I0 and I1 – income before and after the change.
The elasticity of demand is greatly influenced by the availability of goods on the market designed to satisfy the same need, i.e. substitute goods. The elasticity of demand for a product is higher, the more opportunities a buyer has to refuse to purchase a particular product if its price rises.
As our income increases, we buy more clothes and shoes, high-quality food products, household appliances. But there are goods for which demand is inversely proportional to consumer income: all “second hand” products, some types of food (cereals, sugar, bread, etc.).
For essential goods, such as bread, demand is relatively inelastic. At the same time, the demand for certain types of bread is relatively elastic. The demand for cigarettes, medicines, soap and other similar products is relatively inelastic.
If there are a significant number of competitors on the market, the demand for products from companies producing similar or similar products will be relatively elastic. As the competitiveness of firms increases, when many sellers offer the same products, the demand for each firm's product will be perfectly elastic.
To determine the degree of influence of a change in the price of one product on a change in demand for another product, the concept of cross elasticity is used. Yes, price increase butter will cause an increase in demand for margarine, a decrease in the price of Borodino bread will lead to a reduction in demand for other types of black bread.
Cross Elasticity – demand dependence from substitute goods and goods that complement each other.
Cross elasticity coefficient – is the ratio of the percentage change in demand for good A to the percentage change in the price of good B:
where “c” in the index means cross elasticity (from the English cross).
The value of the coefficient depends on which products are considered - interchangeable or complementary. The cross elasticity coefficient is positive if the goods interchangeable; negative if goods complementary, such as gasoline and automobiles, cameras and film, the quantity demanded will change in the direction opposite to the change in prices.
Thus, by determining the value of the cross-elasticity coefficient, one can find out whether the selected goods are considered complementary or interchangeable, and accordingly, how a change in the price of one type of product produced by a firm can affect the demand for other types of products of the same firm. Such calculations will help the company when making decisions on pricing policy for manufactured products.
Price elasticity is greatly influenced by time factor. Demand is less elastic in the short run and more elastic in the long run. This trend in elasticity changes over time is explained by the consumer’s ability to change his consumer basket over time and find a substitute product.
Price Elasticity of Demand
Price Elasticity of Demand shows by what percentage the quantity demanded will change when the price changes by 1%. The price elasticity of demand is influenced by the following factors:
§ Availability of competitor products or substitute products (the more there are, the greater the opportunity to find a replacement for a product that has become more expensive, that is, the higher the elasticity);
§ Unnoticeable price level changes for the buyer;
§ Conservatism of buyers in tastes;
§ Time factor (the more time the consumer has to choose a product and think about it, the higher the elasticity);
§ Specific gravity goods in consumer expenses (the greater the share of the price of the goods in consumer expenses, the higher the elasticity).
Cross elasticity 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. Positive value magnitude means that these goods are interchangeable (substitutes), negative meaning shows that they are complementary (complements).
where the upper index means that this is the elasticity of demand, and the lower index indicates that this is the cross elasticity of demand, where and means any two goods. That is, 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 variables, I distinguish the following connections between goods and:
28)))Elasticity of supply, factors determining it
Elasticity of supply is an indicator that reproduces changes in aggregate supply that occur in connection with rising prices. In the case when the increase in supply exceeds the increase in prices, the latter is characterized as elastic (elasticity of supply is greater than one - E> 1). If the increase in supply is equal to the increase in prices, supply is called unit, 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 (elasticity of supply is less than one - E<1). Таким образом, эластичность предложения характеризует чувствительность (реакция) предложения товаров на изменения их цен.
Supply elasticity is calculated through the supply elasticity coefficient using the formula:
- K m - supply elasticity coefficient
- G - percentage change in the quantity of goods offered
- F - percentage of price change
The elasticity of supply depends on factors such as the specifics of the production process, the time of production of the product and its ability to be stored for a long time. Features of the production process allow the manufacturer to expand production of a product when the price increases, and when its price decreases, it switches to the production of other products. The supply of such a product is elastic.
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 requires considerable time. For example, it is almost impossible to increase the production of cars in a week, although their price can increase many times over. In such cases, supply 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 factors that change supply. Changes in production costs due to resource prices, changes in taxes and subsidies, advances in science and technology, and new technologies. Reducing costs allows the manufacturer to deliver more goods to the market. An increase in cost leads to the opposite result - supply decreases. Changes in prices for other goods, in particular for substitute goods. Individual tastes of consumers. Prospective expectations of manufacturers. With forecasts regarding rising prices in the future, producers may reduce supply in order to soon sell the product at a higher price, and conversely, the expectation of falling prices forces producers to get rid of the product as soon as possible so as not to incur losses in the future. The number of commodity producers directly affects supply, since the more suppliers of goods, the higher the supply and vice versa, with a decrease in the number of producers, supply sharply decreases.
29))) Violations of market price equilibrium.
In a competitive system, equality of supply and demand leads to
equilibrium in all markets. However, the equilibrium price may change
(the equilibrium point shifts in one direction or another). Some impacts
it is impossible to predict the market equilibrium of prices, the influence of others should be taken into account
difficult because they only move the equilibrium point without breaking the laws
supply and demand. Recent impacts include, for example,
taxation.
Tax is one of the economic levers of market regulation.
By shifting the equilibrium price point, the tax does not violate the laws of demand and
offers.
Tax and equilibrium market price.
Taxation is the prerogative of the state applying
many types of direct and indirect taxes. Consequences
taxes have a negative impact on both consumers and
manufacturers of goods. These consequences are reflected in an increase in price
goods, on the one hand, and in reducing the volume of production of goods – on the
another. An increased price, as is known, causes a reduction in consumer consumption.
demand, resulting in an inevitable reduction in the volume of sales of goods,
subject to taxation. Manufacturers will respond to this situation
unequivocally: they will reduce the production and presentation of goods to the market,
demand for which has decreased.
There was no violation of the laws of supply and demand, since the tax
only created the prerequisites for moving the equilibrium point of demand and
proposals to a new, higher level.
30))) Resource markets are in many ways similar to goods markets,
the functioning of which was discussed earlier.
Theories of supply and demand, categorical
the apparatus of limit analysis is applicable to markets
resources in the same way as to commodity markets.
However, if in commodity markets producers
of goods are firms, and consumers are
households, then in resource markets it is the other way around.
Households own and supply resources
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 Interest
Information
(entrepreneurial
capabilities)
Entrepreneur Profit
Resource costs for firms are costs
production.
Every company that wants to maximize its
profit, strives to reduce costs,
purchasing production resources from
minimal costs.
The company prefers to purchase more
productive resource.
The price of resources is determined on the market under the influence of demand for
resources and their offers.
The company forms its demand for resources based on three factors:
demand for finished products, resource prices and its
productivity. The most important of these three factors is demand.
for finished products. If there is no demand for the product,
produced from a resource, then no matter how productive or
No matter how cheap the resource is, there will be no demand for it.
The demand for resources is derived (dependent) from 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 the degree of their
interchangeability.
The production costs discussed above represent the costs of resources purchased by firms in resource markets. The same laws of supply and demand and the same market pricing mechanism operate in these markets. However, resource markets, to a greater extent than final product markets, are influenced by non-economic factors - the state, trade unions, other public organizations (green movement, etc.).
The prices of resources that are formed in the relevant markets determine:
Income of resource owners (for the buyer, price is a cost, expense; for the seller, it is income);
Resource allocation (obviously, the more expensive a resource is, the more efficiently it should be used; thus, resource prices contribute to the allocation of resources between industries and firms);
The level of production costs of a company, which with a given technology are entirely dependent on the prices of resources.
In the resource market, the sellers are households who sell their property to enterprises. primary resources – labor, entrepreneurial skills, land, capital and firms that sell each other so-called intermediate products - goods necessary for the production of 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 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;
the maximum productivity of the resource, measured, recall, by the marginal product ( MR). If buying a machine gives a greater increase in output than hiring one worker, then, obviously, the company, other things being equal, will prefer to buy the machine.
Taking these circumstances into account, each company, when 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 marginal cost of a resource.
Marginal profitability of a 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 input resource. By purchasing a unit of resource and using it in production, the firm will increase its production volume by the value of the marginal product ( MP). Selling this product (at 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 cost of a resource characterize the increase in production costs due to the acquisition of an additional unit of resource. Under conditions of perfect competition, this increase in costs equal to 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 of including labor in the economic system. In a market economy, labor acts as a commodity and can be assessed and optimized. The labor market is characterized by a system of relations 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 supplemented by intermediaries.
Principles of functioning of the labor market:
Labor demand is the solvent need of employers for the labor services of workers of certain professions and qualifications. Determined by the needs of enterprises, aggregate demand, and technical equipment of production. Labor costs are more important than equipment costs.
Labor supply is the number of people in need of employment, determined by the amount of working time that labor force carriers agree to work, subject to a certain level of remuneration (sources - graduates; laid off; those who have not previously worked or were engaged in housework). It is determined by the level of wages, the tax system, culture and religion, the strength of trade unions, the amount of unemployment assistance, and child care.
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 are the price of labor power. It is influenced by: the cost of labor power - the cost of subsistence is taken into account. Minimum wage, maximum; skill level - difficult work requires better living conditions (high cost); national differences - social conditions, degree of economic development; state - part of the necessary product in the form of taxes is allocated to social protection, development of the social sphere; market conditions labor - the relationship between demand and supply of labor. Forms of wages - hourly, working hours, nominal, real.
32)))Land market and rent. Capital market and interest.
The land market is a market for natural resources necessary for the production of goods and services. Natural resources are everything that can be used in production in its natural state: fertile lands, free space for construction, forests, minerals, etc. A feature of land supply is its absolute inelasticity. The income of the owner of the land is called rent or ground rent. The income received from a factor of production that has perfectly inelastic supply is called pure economic rent.
Rent is the income resulting from the use of a resource at a higher productivity, provided that its supply is inelastic.
Land ownership means recognition of the right of a given (individual or legal) person to a certain plot of land on historical grounds. Most often, land ownership refers to the right to own land. Land tenure is carried out by land owners.
Land use is the use of land in the manner established by custom or law. The user of land is not necessarily its owner. In real economic life, subjects of land ownership and land use are often represented by different individuals (or legal entities).
The capital market is part of the financial market in which long-term money circulates, that is, money with a circulation period of more than a year. In the capital market, free capital is redistributed and invested in various profitable financial assets. The forms of circulation of funds (financial resources) in the capital market can be different: bank loans (loans); stock; bonds; financial derivatives.
Bank loan (credit) is a monetary loan issued by a bank for a certain period on the terms of repayment and payment of interest.
Loan - the transfer of money, things and other property by the lender to the borrower under a loan agreement or under an agreement for gratuitous use on the terms of return.
A share is an issue-grade security that secures the rights of its owner (shareholder) to receive part of the profit of the joint-stock company in the form of dividends, to participate in the management of the joint-stock company and to part of the property remaining after its liquidation. Typically, a share is a registered security.
A bond is an issue-grade debt security, the owner of which has the right to receive from the issuer of the bond its nominal value in cash or in the form of another property equivalent within a specified period. A bond may also provide for the owner's right to receive a fixed percentage (coupon) of its face value or other property rights.
Derivative is an agreement (contract) that, in accordance with its terms, provides for the parties to the contract to exercise rights and/or fulfill obligations associated with changes 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 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 a bank or other borrower must pay a lender for the use of money for a specified period.
33)))Output: total average and marginal product. Law of Diminishing Returns
PRODUCTION VOLUME is the result of the enterprise’s activities in the production of any product and provided production services.
In order to reflect the influence of a variable factor on production, the concepts of aggregate (total), average and marginal product are introduced.
Total product (TP) is the quantity of an economic good produced using some quantity of a variable factor.
The marginal product (MP) of a variable factor of production is the increase in output obtained by using 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 that as the use of a factor of production increases (holding other factors of production fixed), a point is eventually reached at which additional use of that factor leads to a decrease in output.
The Law of Diminishing Returns states that, after a certain point, the successive addition of units of a variable resource (such as labor) to a fixed, fixed resource (such as capital or land) produces a diminishing surplus, or marginal, product for each subsequent unit. variable resource.
In other words, if the number of employees serving a given area of activity increases, then the growth in production volume will occur after a certain point more and more slowly, as the number of workers in production increases.
34)))Production costs, their types. Positive and diseconomies of scale
Production costs are expenses, monetary expenditures that must be made to create a product. For an enterprise (firm), they act as payment for acquired factors of production. These types of expenses cover payment for materials (raw materials, fuel, electricity), wages of employees, depreciation, and costs associated with production management. When selling a product, the entrepreneur receives cash proceeds. One part of it compensates for production costs (i.e., the costs of money associated with the production of goods), the other provides profit, the reason for which production is organized. This means that production costs are less than the cost of the product by the amount of profit. Thus, production costs are the costs of producing a given finished product, as opposed to one-time costs associated with the advance of capital that is needed to initially organize the production process.
Opportunity "explicit" and "implicit" costs
Opportunity Cost- these are the costs of producing a product, assessed in terms of the lost opportunity to use the same resources for other purposes. Opportunity costs that firms face include payments to workers, investors, and natural resource owners. All these payments are made to attract factors of production, diverting them from alternative uses.
From an economic point of view, opportunity costs can be divided into two groups: “explicit” and “implicit”.
Explicit costs- These are opportunity costs that take 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 services of banks and insurance companies; payment to suppliers of material resources. Implicit costs- these are the opportunity costs of using resources owned by the company itself, i.e., unpaid costs.
Production costs, including normal or average profit, are economic (opportunity) costs.
Domestic costs are those associated with the use of one’s own products, which turn into a resource for the company’s further production. External costs are the costs of money that are made to acquire resources that are the property of those who are not the owners of the company. The costs that a firm incurs in producing a given volume of output depend on the possibility of changing the quantity of all employed resources.
Fixed costs are costs that do not depend in the short term on how much the company produces. They represent the costs of its constant factors of production. Permanent costs are associated with 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 that cannot be avoided even if the business ceases are called irrevocable costs. The cost of renting premises for a company's office is considered a fixed cost, which is not sunk, since the company can avoid these costs by ceasing its activities. But if a firm temporarily closes, it can avoid paying for any variable factor of production. Variables costs are costs that depend on the firm's output. They represent the costs of the firm's variable factors of production. These include costs of raw materials, fuel, energy, transport services, etc. The majority of variable costs typically come from labor and materials. To understand whether producing an additional unit of output is profitable, it is necessary to compare the resulting change in income with the marginal cost of production. Limit costs are the costs associated with producing an additional unit of output.
Economies of scale associated with changes in the cost of a unit of output depending on the scale of its production by the company. Considered in the long term. Reducing costs per unit of production as production is enlarged is called economies of scale. The shape of the long-term cost curve is associated with economies of scale in production.
Positive Economies of scale occur when, as the number of products produced and the level of influence in the market increases, unit costs decrease. Usually associated with a deepening division of labor. Thanks to this effect, the transition from manual labor to manufacture and then to the assembly line with a simultaneous increase in production turned out to be very profitable. It also becomes possible to use expensive technologies and produce by-products from waste. As long as there is a positive effect of scale, the company should increase its production capacity.
Negative effect of scale. The opposite of the positive effect, in which average costs increase along with the growth of the enterprise. Associated with some loss of controllability and decreased flexibility in responding to changes in the external environment, and an increase in intra-organizational contradictions. It is observed due to technical reasons during mining, due to the fact that it is more difficult to extract each subsequent ton of coal or barrel of oil from the ground than the previous one.
35)))Enterprise income: total, average and marginal income
Enterprise income is an increase in economic benefits as a result of the receipt of assets (cash, other property) and (or) repayment of liabilities, leading to an increase in the capital of the enterprise of this enterprise, with the exception of contributions of participants (owners of property).
Receipts from other legal entities and individuals are not recognized as income:
tax amounts;
under a commission agreement and other similar agreements in favor of the principal, etc.:
in advance payment for products, works, services;
deposit, pledge;
loan repayment.
Total income is the amount of revenue that a company receives from the sale of goods on the market. In general, a firm sells a product at different prices and, therefore, total revenue can be represented as the sum of the revenue received at each price, which is equal to the product of the price of the product and the number of units sold:
Average income is the total income per unit of production:
Marginal revenue represents the increase in the firm's total revenue resulting from the sale of an additional unit of goods:
36)))Profit, its types, profit maximization
Profit - acts as the excess of income from the sale of goods (services) over costs incurred (capital).
Profit is one of the general assessment 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-operating operations, and they are reduced by the amount of all expenses for 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 taxes, excise taxes, VAT and the costs 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 penalties, fines, penalties, interest, exchange rate differences on all currency accounts, past losses and profits that were identified in the reporting year, and so on.
Taxable profit is the difference between book profit and the sum of rental payments, income taxes, import and export taxes.
Clean profits are directed to social and industrial development, the creation of reserve funds, material incentives for all workers, the payment of various economic sanctions to the budget, charity, and so on.
Consolidated profit, consolidated across all financial statements on the activities and, in addition, the financial results of subsidiaries and parent enterprises.
Maximization profit - represents the difference between the marginal revenue from the sale of an additional unit of output and the marginal cost.
Limit costs - additional costs leading to an increase in output by one unit of good. Marginal costs are entirely variable costs because fixed costs do not change with output. For a competitive firm, marginal cost equals the market price of the product.
In the case of profit maximization, the difference between the proceeds from its sale and total costs reaches a maximum. Maximization of the total profit of an enterprise occurs when the price of a product becomes equal to the marginal costs of its production and circulation.
Demand for a product changes under the influence of price changes in the markets for substitute and complementary goods. Quantitatively, this dependence is characterized by the coefficient of cross price elasticity of demand, which shows how the quantity of demand for a given product will change when the price of another product changes. The formula for calculating the coefficient of cross elasticity of demand for product A depending on changes in the price of product B is as follows:
Calculating the coefficient of cross price elasticity of demand allows you to answer by how many percent the quantity of demand for product A will change if the price of product B changes by one percent. Calculating the cross-elasticity coefficient makes sense primarily for substitute and complementary goods, since for weakly interrelated goods the value of the coefficient will be close to zero.
Let's remember the example of the chocolate market. Let's say we also conducted observations of the halva market (a product that is a substitute for chocolate) and the coffee market (a product that is a complement to chocolate). Prices for halva and coffee changed, and as a result, the volume of demand for chocolate changed (assuming all other factors remain unchanged).
Applying formula (6.6), we calculate the values of the coefficients of cross price elasticity of demand. For example, when 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, with a decrease in the price of halva by 1%, the demand for chocolate in a given price range decreases by 1.27%, i.e. is elastic relative 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 deniers. units:
Thus, when the price of coffee decreases by 1%, the quantity 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 with respect to the price of good B is positive, we are dealing with substitute 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 only valid for small price changes. If price changes are large, then the demand for both goods will change under the influence of the income effect. In this case, products may be incorrectly identified as complements.
Income Elasticity of Demand
The previous chapter examined the dependence of demand on consumer income. For normal goods, the higher the consumer's income, the higher the demand for the product. For lower category goods, on the contrary, the higher the income, the lower the demand. However, in both cases, the quantitative measure of the relationship between income and demand will be different. Demand may change faster, slower, or at the same rate as consumer income, or not at all for some goods. The income elasticity of demand coefficient, which shows the ratio of the relative change in the quantity of demand for a product and the relative change in consumer income, helps determine the measure of the relationship between consumer income and demand:
Accordingly, the coefficient of income elasticity of demand can be less than, greater than or equal to one in absolute value. Demand is income elastic if the quantity of demand changes to a greater extent than the quantity of income (E0/1 > 1). Demand is inelastic if the quantity demanded changes less than the quantity of income (E0/ [< 1). Если величина спроса никак не изменяется при изменении величины дохода, спрос является абсолютно неэластичным по доходу (. Ед // = 0). Спрос имеет единичную эластичность (Ео/1 =1), если величина спроса изменяется точно в такой же пропорции, что и доход. Спрос по доходу будет абсолютно эластичным (ЕО/Т - " со), если при малейшем изменении дохода величина спроса изменяется очень сильно.
In the previous chapter, the concept of the Engel curve was introduced as a graphical interpretation of the dependence of the quantity of demand on the consumer’s income. For normal goods the Engel curve has a positive slope, for goods of the lowest category it has a negative slope. The income elasticity of demand is a measure of the elasticity of the Engel curve.
The income elasticity of demand depends on the characteristics of the product. For normal goods, the income elasticity of demand is positive sign(Eо/1 > 0), for goods of the lowest category - negative sign(-Unit //< 0), для товаров первой необходимости спрос по доходу неэластичен (ЕО/Т < 1), для предметов роскоши - эластичен (Е0/1 > 1).
Let's continue our hypothetical example with the chocolate market. Let's say we observed changes in the incomes of chocolate consumers and, accordingly, changes in the demand for chocolate (we will assume all other characteristics unchanged). The observation results are listed in Table 6.3.
Let us calculate the elasticity of demand for chocolate with respect to income on the segment where the amount of income grows from 50 to 100 deniers. units, and the quantity of demand - from 1 to 5 units. chocolate:
Thus, in this segment, the demand for chocolate is income elastic, i.e. When income changes by 1%, the quantity demanded for chocolate changes by 2%. However, as income increases, the elasticity of demand for chocolate decreases from 2 to 1.15. This has a logical explanation: at first, chocolate is relatively expensive for the consumer, and as income increases, the consumer significantly increases the volume of chocolate purchases. Gradually, the consumer becomes saturated (after all, he cannot eat more than 3-5 bars of chocolate per day; among other things, it is unsafe for health), and further growth in income no longer stimulates the same growth in demand for the product. If we continued our observations, we could see that at very high incomes, the demand for chocolate becomes income inelastic (Eo/1< 1), а потом и вовсе перестает реагировать на изменение дохода (Еп/1 - " 0). Вид кривой Энгеля для этого случая представлен на Рис.6.6.
Ш Let's consider the relationship between consumer income and their demand using the example of the Republic of Belarus. Table 6.4 shows data on the monetary income of households in the country in different years and information on the structure of household consumption. Since price indicators fluctuated significantly due to inflation and other factors, we are interested in percentage changes in real incomes of consumers and changes in the structure of consumption.
