The long-term equilibrium of a perfectly competitive industry is ensured at. Equilibrium of a perfectly competitive firm in the short and long run

Entry into and exit from a perfectly competitive market is open to all firms without exception. Therefore, in the long run, the level of profitability becomes the regulator of the resources used in the industry.

If the level of market prices established in the industry is above the minimum of average costs, then the possibility of obtaining economic profits will serve as a kind of incentive for new firms to enter the industry. The absence of barriers on their way will lead to the fact that an increasing share of resources will be directed to the production of this type of goods.

And, conversely, economic losses will act as a disincentive, scaring off entrepreneurs and reducing the amount of resources used in the industry. After all, if a firm intends to leave the industry, then in conditions of perfect competition it will not encounter any barriers in its path. That is, the company in this case will not incur any sunk costs and will find a new use for its assets or sell them without harm to itself. Therefore, it can really fulfill its desire to move resources to another industry.

Zero economic profit

The relationship between the level of profitability in a competitive industry and the size of the use of resources in it, and hence the volume of supply, predetermines break-even of firms operating in a competitive industry in the long run(or equivalently, their receipt zero economic profit). The mechanism of establishment of zero economic profit is shown in fig. 7.12.

Let in a competitive industry (Fig. 7.12 b) initially there is an equilibrium (point O), dictating a certain price level P0, at which the firm (Fig. 7.12 a) receives zero profit in the short run. Suppose further that the demand for the products of the industry suddenly increased. The sectoral demand curve in this situation will move to position , and a new short-term equilibrium will be established in the industry (equilibrium point, equilibrium supply, equilibrium price). For the firm, the new higher price level will be a source of economic profit (the price lies above the average total cost of ATC).

Economic profits will attract new producers to the industry. The consequence of this will be the formation of a new supply curve, shifted compared to the original in the direction of large volumes of production. A new, slightly lower price level will also be established. If economic profits are maintained at this price level (as in our diagram), then the influx of new firms will continue, and the supply curve will shift further to the right. In parallel with the influx of new firms into the industry, the supply in the industry will also increase under the influence of the expansion of production capacities by firms already operating in the industry. Gradually, all of them will reach the level of the minimum average long-term costs (LATC), i.e. reached the optimal size of the enterprise (see "Costs").

Rice. 7.12.

It is obvious that both of these processes will last until the supply curve takes the position , which means zero profits for firms. And only then will the influx of new firms dry up - there will no longer be an incentive for it.

The same chain of consequences (but in the opposite direction) unfolds in the event of economic losses:

1. reduction in demand.
2. price drop (short-term).
3. emergence of economic losses at firms (short-term period).
4. outflow of firms and resources from the industry.
5. reduction in long-term market supply.
6. price increase.
7. break-even recovery (long-term).
8. stopping the outflow of firms and resources from the industry.

Thus, perfect competition has a peculiar mechanism of self-regulation. Its essence lies in the fact that the industry responds flexibly to changes in demand. It attracts an amount of resources that increases or decreases the supply just enough to compensate for the change in demand. And on this basis, it ensures the long-term break-even of firms.

Long run equilibrium conditions

Summing up, we can say that the equilibrium established in the industry in the long run satisfies three conditions:

All three of these long-run equilibrium conditions can be summarized as follows:

Long run industry supply curve

If we connect all the points of possible long-term equilibrium, then a long-term supply line of a competitive industry () is formed.

Indeed, the equilibrium points O and in fig. 7.12 actually outline the position of the long-term supply curve. They show that, in the long run, a competitive industry can provide any amount of supply at the same price. Indeed, repeating the above chain of reasoning, it is easy to come to the following conclusion: no matter how demand changes, the supply will react in such a way that, in the end, the equilibrium point will again return to the level corresponding to the level of zero economic profit for firms operating in the industry.

So the general principle is that The long-run supply curve of a competitive industry is the line through the break-even points for each level of production. On fig. 7.13 shows different variants of the manifestation of this pattern.

Rice. 7.13.

Industries with fixed costs

In the specific example we have considered (see Fig. 7.12), such a line is a straight line parallel to the x-axis and corresponding to the absolute elasticity of the proposal. The latter, however, does not always take place, but only in the so-called industries with fixed costs. That is, in those cases when, with the expansion of its supply, the industry has the opportunity to purchase the necessary resources at constant prices.

As a rule, this condition is met for industries that are relatively small relative to the scale of the entire economy. For example, the growth in the number of gas stations in Russia does not create tension in any of the resource markets that firms enter when building gas stations. Apart from inflation, the creation of reservoirs, the purchase of pumps, the hiring of personnel, etc. the construction of each additional station costs approximately the same amount (the differences can only be related to its size and design). Consequently, the break-even level at which the price of gas station services will freeze under the influence of competition will always be the same. We have depicted this situation in Fig. 7.13 a, combining on the same graph the long-term supply curve of the industry () and the cost curves of a typical firm (), corresponding to a given level of industry-wide production.

For a perfectly competitive market, this situation is quite typical. Recall stalls and shops of various profiles, workshops for the repair and manufacture of various goods, mini-bakeries, confectioneries, etc. All these types of businesses are small across the country, and their expansion is unlikely to affect the prices of purchased resources.

Industries with rising costs

This is not the case if resources become more and more expensive for each new firm entering the market. This usually happens if the growing demand of an industry for a certain resource is so significant that it creates a shortage in the economy as a whole.

This situation is typical for any industries with rising costs where the prices of factors used in production rise as the industry expands and the demand for those factors increases.

With an increase in long-term costs, newcomers to the industry will reach the level of zero economic profit at a higher price than old-timers. If we turn again to Fig. 7.12, then we can say that the influx of new firms into the industry will not bring supply to the level of the curve , but will stop earlier, say, in a position at which firms will find themselves in a new (taking into account the rise in price of resources) break-even position. It is clear that the long-term supply curve () will pass in this case not along a horizontal path, but along an ascending curve.

In such situations, with the expansion of production, the increase in costs can affect even small industries. After all, unique resources are always available in very limited sizes. So, in the history of Russia in the XIX century. similar processes affected, say, the famous malachite crafts (workshops for artistic stone processing), when the fashion for malachite and the growth in output caused by it collided with the depletion of the reserves of this mineral in the Urals. Once a cheap ("cheerful") stone quickly became expensive, even the kings did not neglect crafts from it, which is perfectly described by P. Bazhov.

Industries with falling costs

Finally, there are industries in which the prices of factors of production decrease as production expands. The minimum average cost in this case also decreases in the long run. And the growth of industry demand in the long run causes a simultaneous increase in supply and a decrease in the equilibrium price.

The long-term supply curve of an industry with falling costs has a negative slope (Fig. 7.13 c).

Such a super-favorable development of events is usually associated with economies of scale in the production of suppliers of resources (raw materials, equipment, etc.) for this industry. For example, it is likely that as farming in Russia grows and becomes stronger, their costs will experience a long-term reduction. The fact is that machines and equipment adapted for farmers are now produced literally by the piece, and therefore very expensive. With the appearance of mass demand for them, production will be put on stream and the cost will drop sharply. Farmers, having felt the cost reduction (in Fig. 7.13 from to ), will themselves begin to reduce the price of their products (curve falling).

A competitive firm can occupy a variety of positions in an industry. It depends on what its costs are in relation to the market price of the good that the firm produces. In economic theory, there are three general cases of the ratio of average costs (AC) of the firm and the market price (P), which determines the position of the firm in the industry in the short run - the presence of losses, the receipt of normal profits or excess profits.

In the first case, we observe an unsuccessful, inefficient firm that incurs losses: its costs AC are too high compared to the price of goods P on the market and do not pay off. Such a firm should either modernize production and reduce costs, or leave the industry.

Rice. 6.8. The company is making a loss

In the second case, the firm achieves equality between average costs and price (AC = P) with the volume of production Q e , which characterizes the equilibrium of the firm in the industry. After all, the function of the average costs of a firm can be considered as a function of supply, and demand, as we remember, is a function of price (P). This is where equality between supply and demand is achieved, i.e., equilibrium. The volume of production Q e in this case is equilibrium. In equilibrium, the firm earns only normal profit, including accounting profit, and economic profit is zero. The presence of a normal profit provides the firm with a favorable position in the industry.

The absence of economic profit creates an incentive to seek competitive advantages - for example, the introduction of innovations, more advanced technologies, which can further reduce the company's costs per unit of output and temporarily provide excess profits.

Rice. 8.8. Firm earning excess profits

However, it is possible to more accurately determine the moment when it is necessary to stop increasing production so that profit does not turn into losses, as, for example, with an output of Q 3 . To do this, it is necessary to compare the marginal cost (MC) of the firm with the market price, which for a competitive firm is also marginal revenue (MR). Recall that marginal cost reflects the individual cost of producing each successive unit of a good and changes faster than average cost. Therefore, the firm reaches its maximum profit (at MC = MR) much earlier than the average cost equals the price of the goods.

The condition for marginal cost to be equal to marginal revenue (MC = MR) is production optimization rule.

Compliance with this rule helps the company not only maximize profits, but also minimize losses.

So, a rationally operating firm, regardless of its position in the industry (whether it suffers losses, whether it receives normal profits or excess profits), should produce only the optimal volume of products. This means that the entrepreneur will always stop at the level of output at which the cost of producing the last unit of the good (i.e., MC) will coincide with the amount of income from the sale of this last unit (i.e., MR). We emphasize that this situation characterizes the behavior of the firm in the short run.

In the long run, industry supply changes. This happens due to an increase or decrease in the number of market participants. If the equilibrium price prevailing in the industry market is above average costs and firms make excess profits, then this stimulates the emergence of new firms in a profitable industry. The influx of new firms expands the industry offer. An increase in the supply of a good in the market leads to a decrease in the price. Falling prices automatically reduce the excess profits of firms.

Prices move up and down, each time passing through a level at which P=AC. In this situation, firms do not incur losses, but do not receive excess profits. Such a long-term situation is called equilibrium.

In equilibrium, when the demand price coincides with average costs, the firm produces according to the optimization rule at the level of MR = MC, that is, it produces the optimal volume of production.

Thus, equilibrium is characterized by the fact that the values ​​of all parameters of the firm coincide with each other:

Since the MR of a perfect competitor is always equal to the market price P = MR, the equilibrium condition for a competitive firm in the industry is the equality

The position of a perfect competitor upon reaching equilibrium in the industry is shown in the following figure.

Rice. 9.8. Firm in equilibrium

The price function (market demand) P for the firm's products passes through the intersection point of the AC and MC functions. Since, under perfect competition, the firm's marginal revenue function MR coincides with the demand (or price) function, the optimal production volume Qopt corresponds to the equation AC=P=MR=MC, which characterizes the firm's position in equilibrium (at point E). We see that the firm does not receive any economic profit or loss in the conditions of equilibrium that develops with long-term changes in the industry.

In the long-run (LR - long-run) period, the fixed costs of the firm FC increase when its production capacity increases. In the long run, the expansion of the scale of the firm with the use of appropriate technologies provides economies of scale. The essence of this effect is that the long-term average costs of LRAC, having decreased after the introduction of resource-saving technologies, cease to change and remain at a minimum level as output increases. Once economies of scale have been exhausted, average costs begin to rise again.

The behavior of average costs in the long run is shown in Figure 10.8, where economies of scale are observed when the volume of production changes from Q a to Q b . Over the long run, the firm changes its scale in search of the best output and lowest costs. According to the change in the size of the firm (the volume of production capacity), its short-term costs AC change. The various options for the size of a firm, depicted as short-run AC in Figure 10.8, give an idea of ​​how a firm's output may change in the long run (LR). The sum of their minimum values ​​is the firm's long-run average cost (LRAC).

Rice. 10.8. The average cost of the firm in the long run

In the long run, the best scale for a firm is that at which short-run average cost reaches the minimum level of long-run average cost (LRAC). After all, as a result of long-term changes in the industry, the market price is set at the level of the LRAC minimum. Thus, the firm reaches a long-run equilibrium. In conditions of equilibrium in the long run, the minimum levels of short-term and long-term average costs of the firm are equal not only to each other, but also to the price prevailing in the market. The firm's position in long-run equilibrium is shown in Figure 11.8.

Rice. 11.8. The position of the firm in a long-run equilibrium

In the long run, the equilibrium of a competitive firm is characterized by the fact that the optimal output is achieved if the equality P=MC=AC=LRAC is observed.

Under these conditions, the firm finds the optimal scale of production capacity, i.e., optimizes the long-term output.

Note that economic profits under perfect competition are short-term. In long-run equilibrium, the firm earns only normal profits.

In this position, the average and marginal costs of the firm coincide with the equilibrium price in the industry, which has developed when the industry-wide supply and demand are equalized. Note also that the condition for profit maximization is the equality of marginal revenue and marginal cost and the maximum gap between total income and total cost.

TOPIC: FIRM BEHAVIOR UNDER PERFECT COMPETITION

1. Perfect competition: features, advantages and disadvantages

The competitiveness of a large number of small business entities, when none of them is able to have a decisive influence on the general conditions for the sale of a homogeneous product in a given market, is called perfect competition. The perfect competition model is characterized by five features or assumptions:

1. Homogeneity of products sold. All units of goods in the view of the buyer are exactly the same. The buyer does not have the ability to recognize who made the product. The totality of all enterprises producing homogeneous products forms an industry.

2. The presence of a large number of economic agents (sellers and buyers). A large number means that even large buyers and producers represent volumes of supply and demand that are negligible on the scale of the market.

3. Free entry and exit from the market, that is, the absence of any barriers.

4. Perfect informability of sellers and buyers about goods and prices, that is, market participants have perfect knowledge of all market parameters, since information is distributed instantly.

5. None of the sellers and buyers is able to influence the market price, since the share of each firm in the industry market is insignificant, therefore the demand curve of an individual firm is horizontal (that is, perfectly elastic). A perfect competitor can sell any number of products at the market price. At the same time, the additional income received from the sale of each additional unit of production corresponds exactly to its market price.

Rice. 1.9. Demand for the products of a competitive firm

Let's highlight the advantages of perfect competition:

1) Perfect competition forces firms to produce products at the lowest average cost and sell it at a price corresponding to this cost. Graphically, this means that the average cost curve only touches the demand curve (see figure 11.8 The position of the firm in long-term equilibrium in topic 8). If the cost of producing a unit of output were higher than the price (AC > P), then any product would be economically unprofitable, and firms would be forced to leave this industry. If average costs were below the demand curve, and, accordingly, prices (AC< P), это означало бы, что кривая средних издержек пересекает кривую спроса и образуется некий объем производства, приносящий сверхприбыль. Приток новых фирм свел бы эту прибыль на «нет». Таким образом, кривые только касаются друг друга, что и создает ситуацию длительного равновесия.

2) Perfect competition helps to allocate limited resources in such a way as to achieve maximum satisfaction of needs. This is provided when P=MC. This provision means that firms will produce the maximum possible amount of output until the marginal cost of the resource is equal to the price for which it was bought. This achieves not only high resource allocation efficiency, but also maximum production efficiency.

The disadvantages of perfect competition include:

1) Perfect competition does not provide for the production of public goods, which, although they bring satisfaction to consumers, however, cannot be clearly divided, evaluated and sold to each consumer separately (by the piece). This applies to public goods such as fire safety, national defense, and so on.

2) Perfect competition, involving a huge number of firms, is not always able to provide the concentration of resources necessary to accelerate scientific and technological progress. This primarily concerns fundamental research (which, as a rule, is unprofitable), science-intensive and capital-intensive industries.

3) Perfect competition contributes to the unification and standardization of products. It does not take full account of the wide range of consumer choices. Meanwhile, in a modern society that has reached a high level of consumption, various tastes are developing. Consumers are increasingly considering not only the utilitarian purpose of a thing, but also pay attention to its design, design, and the ability to adapt it to the individual characteristics of each person. All this is possible only under conditions of differentiation of products and services, which, however, is associated with an increase in production costs.

In the long run, firms, by changing the value of all resources involved in production, seek to optimize their size and minimize long-term average costs. In addition, firms already in the industry have plenty of time to either expand or scale back production capacity. New firms can enter the industry, and old firms can leave it, since entry and exit is free.

The purpose of further analysis is to describe the adaptations of a competitive firm to changing conditions and to determine the conditions for the firm's long-term equilibrium.

In the long run, for an individual firm, the distinction between fixed and variable costs disappears. In order to increase profits, the firm seeks to reduce average costs, so in the long run it changes its size with changes in production volumes. In a graphical interpretation, this will look like a transition from one short-term average cost curve (for example, PBX 1) to another ( PBX 2), rice. 3.10.

With positive economies of scale, the long-run average cost curve (LAC) has a negative slope. In the case of an increase in the cost of increasing the scale of production, the curve LAC has a positive slope, indicating diminishing returns to scale. Thus, when planning a long-term expansion or reduction in production, the firm seeks to find the optimal size and minimize long-term average costs.

Let us now consider how the equilibrium of a firm changes in the long run with a change in the number of firms in a competitive industry. If, in the short run, the price exceeds the firm's average total cost, then the opportunity for economic profit will attract new firms into the industry. But this expansion of the industry will increase the supply of output until the price falls and equals the average total cost. Conversely, if the price of the good is initially less than the average total cost, the inevitable loss will cause firms to leave the industry. The total supply of products on the market will decrease, again raising the price to parity with the average total cost. Therefore, in the long run, the competitive price will tend to equal the minimum of the firm's average total cost.

Under perfect competition, equilibrium is reached when economic profit is zero. In such a situation, there are no incentives to expand or contract output, and there are no incentives for new firms to enter the industry, and for old firms to leave it.

As a result, the long-run equilibrium of the firm is achieved under the condition that: LRMC=LRAC=P(Fig. 3.11).

This triple equality means that:

1. Firms Operate Efficiently with Optimum Use of Capacity (LRMC=LRAC).

2. The output volume is optimal (LRMC=P).

3. Public resources are optimally distributed, because marginal cost is equal to the demand for the product (LRMC=P=D).

4. Economic profit is zero; there are no incentives for the transfer of capital (LRAC=P).

There is a "paradox of profit" - each firm seeks to maximize economic profit, and industry equilibrium occurs when the desired profit is zero.

Long-term industry supply depends on changes in resource prices. If the prices of traditional resources are unchanged, the industry can expand without a significant impact on prices and costs. The expansion and contraction of the industry affects only the volume of production and does not affect the price (Fig. 3.12, a).

If resource prices rise, it means that the industry is using limited specific resources. In this case, expanding the supply of the industry and attracting new firms increases the demand for these resources, and hence their price. Therefore, the long-term costs of firms and prices for finished products will also grow (Fig. 3.12, b).

If resource prices are falling, the long-term supply curve will have a negative slope (Fig. 3.12, c). This is possible when not only the number but also the size of firms in the industry grows. A larger enterprise can purchase more resources at a lower cost. In this case, the long-run average cost decreases, which leads to a decrease in the price.

Thus, the long-run supply of a perfectly competitive industry depends on changes in resource prices and can take the form of a perfectly elastic, ascending and descending curve.

A competitive firm can occupy a variety of positions in an industry. It depends on what its costs are in relation to the market price of the good that the firm produces. In economic theory, three general cases of the ratio of average costs are considered (AC) firm and market price (R), which determines the position of the company in the industry - receiving excess profits, normal profits, or the presence of losses (Fig. 1).

Figure 1 - Options for the position of a competitive firm in the industry: a - the firm suffers losses; b) receiving a normal profit; c) making super profits

In the first case (Fig. 1, a), we see an unsuccessful, inefficient firm incurring losses: its costs AC too high compared to the price of the product R in the market, and do not pay off. This firm should either modernize production and reduce costs, or leave the industry.

In the second case (Fig. 1, b) the firm achieves equality between average cost and price (AC = P) with the volume of production Q e, which characterizes the equilibrium of the firm in the industry. After all, the average cost function of a firm can be considered as a function of supply, and demand, as we remember, is a function of price. R. So equality is achieved between supply and demand, i.e., equilibrium. Volume of production Qe in this case is balanced. Being in a state of equilibrium, the firm receives only normal profit, including accounting profit, and economic profit (ie excess profit) is equal to zero. The presence of a normal profit provides the firm with a favorable position in the industry.

The absence of economic profit creates an incentive to search for competitive advantages - for example, the introduction of innovations, more advanced technologies, which can further reduce the company's costs per unit of output and temporarily provide excess profits.

The position of the firm receiving excess profits in the industry is shown in fig. one, in. In production in the amount of Q1 up to Q 2, the firm has excess profit: income received from the sale of products at a price R, exceeds the firm's costs (AC< Р). It should be noted that the greatest profit is achieved in the production of products in the volume Q2. The size of the maximum profit is marked in fig. 5.4, in shaded area.

However, it is possible to more accurately determine the moment when it is necessary to stop increasing production so that profit does not turn into losses, as, for example, with an output of Q 3 . To do this, it is necessary to compare the marginal costs (MS) a firm with a market price that, for a competitive firm, is also marginal revenue (MR). Recall that marginal cost reflects individual production cost each subsequent unit of goods and change faster than average costs. Therefore, the firm achieves maximum profit (at MS = MR) much sooner than the average cost equals the price of the good.

The condition for marginal cost to be equal to marginal revenue (MC= MR) yesproduction optimization rule.

Compliance with this rule helps the company not only maximize profit, but also minimize loss.

So, a rationally operating firm, regardless of its position in the industry (whether it suffers losses, whether it receives normal profits or excess profits), must produce just the right amount products. This means that the entrepreneur will always stop at such a volume of output at which the cost of producing the last unit of goods (i.e. MS) coincide with the amount of income from the sale of this last unit (i.e., with MR). In other words, the optimal level of production is determined by achieving equality between marginal cost and marginal revenue. (MS=MR) firms. Consider this situation in Fig. 2. .

Figure 2 - The position of a competitive firm in the industry: a - determining the optimal output; b - determination of profit (loss) of a firm - a perfect competitor

On fig. 2, and we see that for this firm the equality MS - M R achieved by the production and sale of the 10th unit of output. Therefore, 10 units of goods is the optimal volume of production, since this volume of output allows you to get the maximum amount of profit, i.e. maximize profit. By producing fewer outputs, such as five units, the firm's profit would be incomplete (to the extent of only part of the shaded figure representing profit).

It is necessary to distinguish between profit from the production and sale of one unit of production (for example, the 4th or 5th) and the total, total profit. When we talk about profit maximization, we are talking about the entire profit, i.e. about receiving the total profit. Therefore, despite the fact that the maximum positive difference between MR and MC gives the production of only the 5th unit of output (Fig. 2, a), we will not stop at this number and will continue to release. We are fully interested in all products, in the production of which MS< M.R., which brings profit before MS alignment and mr. Because the market price P = MR pays for the production costs of the 7th, and even the 9th unit of production, additionally bringing, albeit a small, but still profit. So why give it up? It is necessary to refuse losses, which in our example arise in the production of the 11th unit of output (Fig. 2, a). Starting from it, the balance between marginal revenue and marginal cost changes in the opposite direction: MS > MR. That is why, in order to maximize profits, i.e. to receive all profits, it is necessary to stop completely on the 10th unit of production, at which MS = MR. In this case, the possibilities for further increase in profits have been exhausted, as evidenced by this equality.

So, the considered rule of equality of marginal costs to marginal income underlies the principle of production optimization, which is used to determine optimal, the most profitable, the volume of production at any price emerging on the market.

Now we have to find out what position of the firm in the industry with the optimal output: Will the firm make a loss or make a profit? Let's turn to the second part of Fig. 2, b, where the firm - a perfect competitor - is depicted in full: the graph of the average cost function is added to the MC function AS.

Let's pay attention to what indicators are plotted on the coordinate axes when depicting a company. Not only the market price is plotted on the y-axis (vertically) R, equal to the marginal revenue under perfect competition, but also all types of costs (AC and MS) in terms of money. The abscissa (horizontally) always plots only the volume of output Q.

To determine the amount of profit (or loss), several steps must be taken.

Step one. Using the optimization rule, we determine the output Q opt , in the production of which equality is achieved MS = MR. On the graph, this occurs at the point of intersection of functions MS and MR. Having lowered the perpendicular (dashed line) from this point down to the abscissa axis, we find the desired optimal output volume. For this firm (Fig. 2, b) the equality between MS and MR achieved by the production of the 10th unit of output. Therefore, the optimal output is 10 units.

Recall that under perfect competition, a firm's marginal revenue is the same as its market price. There are many small firms in the industry, and none of them individually can influence the market price, being a price taker. Therefore, for any volume of output, the firm sells each subsequent unit of output at the same price. Accordingly, the price functions R and marginal income MR match ( MR = P), which eliminates the need to search for the optimal output price: it will always be equal to the marginal revenue from the last unit of goods.

Step two. Determine the average cost AC in the production of goods in the volume Q opt . For this, from the point Qopt , equal to 10 units, we draw a perpendicular up to the intersection with the function AU, and then from the resulting intersection point - perpendicular to the left to the y-axis, on which the value of the average cost of production of 10 units of output is plotted AC 10 . We have now learned what the average cost of producing an optimal output is.

Step three. Finally, we determine the size of the profit (or loss) of the firm. We have already found out what the average cost AC of production of a good in the volume Q opt is equal to. It remains to compare them with the price prevailing in the industry, i.e. with market price R.

We see that on the y-axis (vertical) the marked costs AC 10 less price (AC< Р). Therefore, the firm makes a profit. To determine the size of the total profit, we multiply the difference between the price and the average cost, which is the profit from one unit of production, by the volume of the entire output in the amount of Q opt .

Firm profit = (R - AC) X Q opt .

Of course, we are talking about profit, provided that P > AC. If it turns out that R< АС, it means that the company incurs losses, the size of which is calculated according to the same formula.

On fig. 2, b the profit margin is shown as a shaded rectangle. Note that in this case, the firm did not make an accounting profit, but an economic profit, or excess profit that exceeds the opportunity cost.

There is also another way to determine profit(or loss) of the firm. Recall that if the company's sales volume Q op and the market price are known R, then you can calculate the value total income:

TR = P * Q opt .

Knowing the magnitude A C and output, we can calculate the value total costs:

TC = ACxQ opt .

Now it is very easy to determine the value using simple subtraction profit or loss firms:

Profit (losses) of the firm = TR - TC.

If a ( TR - TS)> 0 - the company makes a profit, and if (TR - TS)< 0 - фирма несет убытки.

So, at the optimal output, when MS= M.R.,. A competitive firm can make economic profits (surplus profits) or incur losses.

Why is it necessary to determine the optimal output volume? The fact is that if, when producing products, the company follows the rule of production optimization MC = MR then at any (favorable or unfavorable) price prevailing in the industry, it wins.

Benefit from optimization is as follows. If the equilibrium price in the industry is higher than the average cost of a perfect competitor, then the firm maximizes profit. If the equilibrium price in the market falls below the average cost of the firm, then the rule MS = MR allows the firm to minimize its losses - minimize losses.

What happens in the industry with the company in the long run?

If the equilibrium price prevailing in the industry market is above average costs and firms make excess profits, then this stimulates the emergence of new firms in a profitable industry. The influx of new firms expands the industry offer. An increase in the supply of a good in the market leads to a decrease in the price. Falling prices “eat up” the excess profits of firms.

Continuing to fall, the market price gradually falls below the average costs of firms in the industry. Losses appear, which “drives” unprofitable firms out of the industry. Note that those firms that are not able to take measures to reduce costs leave the market. Thus, the excess supply in the industry is reduced, and in response to this, the price in the market begins to rise again.

So in the long run industry supply is changing. This happens due to an increase or decrease in the number of market participants. Prices move up and down, each time passing through a level at which R = AC. AT In this situation, firms do not incur losses, but they also do not receive excess profits. Such the long-term situation is called equilibrium.

Under conditions of equilibrium, when the demand price coincides with average cost, the firm produces according to the optimization rule at the level MR = MS, i.e. e. produces the optimal volume of products.

Thus, equilibrium is characterized by the fact that the values ​​of all parameters of the firm coincide with each other:

AC=P=MR=MC.

As MR perfect competitor is always equal to the market price R= M.R., then equilibrium condition for a competitive firm in the industry is equality

AC = P = MS.

The position of a perfect competitor upon reaching equilibrium in the industry is shown in Fig. 3.

Figure 3 - The firm is a perfect competitor in equilibrium

On fig. 3 the price function (market demand) P for the firm's products passes through the intersection point of the functions AC and MS. Since under perfect competition the marginal revenue function MR firm coincides with the demand (or price) function, then the optimal production volume Q opt corresponds to the equality AC \u003d P \u003d MR \u003d MS, which characterizes the position of the firm in equilibrium conditions(at point E). We see that the firm does not receive any economic profit or loss in the conditions of equilibrium that develops with long-term changes in the industry.

But what happens to the firm itself? long term or period? Recall that in the long run (LR - long - run period) firm's fixed costs FC grow when its production potential grows. In the long run, the expansion of the scale of the firm with the use of appropriate technologies provides economies of scale. The essence of this effect is that the long-term average LAC costs, having decreased after the introduction of resource-saving technologies, cease to change and, as output increases, remain at a minimum level. Once economies of scale have been exhausted, average costs begin to rise again.

What is the best size for a firm? Obviously, one at which short-run average costs reach a minimum level of long-run average costs (LAC). After all, as a result of long-term changes in the industry, the market price is set at a minimum LRAC. This is how the firm achieves long-run equilibrium. AT equilibrium conditions in the long run the minimum levels of short-term and long-term average costs of the firm are equal not only to each other, but also to the price prevailing in the market. The position of the firm in a state of long-term equilibrium is shown in Fig. 4.

Figure 4 - The position of the firm in terms of long-term equilibrium

In the long run, the equilibrium of a competitive firm is characterized by the fact that the optimal output is achieved when the equality

P=MC=AC=LRAC.

Under these conditions, the firm finds the optimal scale of production capacity, i.e., optimizes the long-term output.

notice, that economic profits under conditions of perfect competition short term. Being in the state research institutes long term balance the firm receives only normal profit.

In this position, the average and marginal costs of the firm coincide with the equilibrium price in the industry, which has developed when the industry-wide supply and demand are equalized.

Conclusion

Competition is a necessary and determining condition for the normal functioning of a market economy. But like any event

has its pros and cons. The positive features include: the activation of the innovation process, flexible adaptation to demand, high product quality, high labor productivity, minimum costs, implementation of the principle of payment according to the quantity and quality of labor, the possibility of regulation by the state. Negative consequences are the "victory" of some and the "defeat" of others, the difference in the conditions of activity, which leads to dishonest methods, the excessive exploitation of natural resources, environmental violations, etc.

Competition is a determining condition for maintaining dynamism in the economy, and in conditions of competition, greater national wealth is created at a lower cost for each type of product compared to a monopoly and a planned economy.

In the short term

A group of individual competing enterprises selling a certain identical product in the market is industry.

If several enterprises operate on the market, then the total supply of the industry (market supply) at each given price is equal to the sum of the supply volumes of all enterprises in the industry:

S S = S 1 + … + S n.

From the supply curves of individual firms the supply curve of a competitive industry develops. On fig. 11.7 shows just such a process of summing the volumes of proposals of two enterprises BUT and AT at every possible price. Compared to the supply curves of individual enterprises, the market supply curve is shifted to the right, i.e. towards higher supply.

Rice. 11.7. Formation of the industry supply curve

In the short term

The offer of a competitive industry and the market demand for its products are equalized at the equilibrium price (Fig. 11.8)

Rice. 11.8. The equilibrium of a perfectly competitive industry

In the short term

This figure shows a fairly simple diagram of the interaction of supply and demand in conditions of perfect competition. The demand curve for the products of the entire industry has the usual form, corresponding to the law of demand, and thus differs from the demand curve for the products of an individual enterprise in conditions of perfect competition. The demand curve for the products of an individual competitive enterprise turned into a horizontal straight line only because the output volumes of the enterprise are negligible compared to the capacity of the entire industry market.

The point of intersection of the supply and demand curves ( E) sets the equilibrium price ( P e) and the equilibrium supply ( Q e). It is the equilibrium price formed within the entire industry ( P e) is further considered by each competitive enterprise as established given, as a price dictated by the market, which should be put up with, regardless of whether it is beneficial or not.

In addition, the equilibrium point for perfect competition is sustainable. Industry supply curve ( S) is the sum of the supply curves of all enterprises operating in the industry. These businesses are a collection of points that maximize profits at different price levels. This is the property of the marginal cost curve ( MS = S). It follows that enterprises are not interested in deviating from the equilibrium point. After all any point not on the curve MS, does not satisfy the rule MR = MC , which means that it does not allow you to get the maximum profit.

The equilibrium stability of a perfectly competitive enterprise is especially strong in the long run.

Behavior of a perfectly competitive firm

In the long run

In the long run, when all types of costs can change
(including those that were constant in the short term), the decision of the enterprise on the volume of output will be made differently, since you can change all production factors, including the size of the enterprise.

If, at the current market price, several enterprises suffer losses and stop production, the supply in the market is reduced. The result of a reduction in supply with constant demand is an increase in price. The increased price will allow the enterprises remaining in the industry to earn economic profits. In conditions of perfect competition, when there are no restrictions on access to the market, new enterprises will appear, attracted by increased profits. As a result, supply will increase and price will decrease. Under perfect competition, such fluctuations are permanent. Market equilibrium will be reached when enterprises will not have incentives to both enter the industry and exit it. This is achieved under the condition that the market price settles at the minimum of long-term average gross costs and economic profit thus disappears (Fig. 11.9).

Rice. 11.9. The equilibrium of a perfectly competitive firm
in the long run

A perfectly competitive firm produces output in the long run only if price
does not fall below long-term average gross costs
(R ≥ LATS). Accordingly, at a price initially lower than the long-term average gross costs, there are losses and an outflow of enterprises from the industry. When the equality of the price of the goods and the minimum possible average total costs in the long run is achieved, the long-term equilibrium of a perfectly competitive enterprise is achieved.