Consider a firm operating in a perfectly competitive market. Perfectly competitive market

This chapter will discuss what influence the market can have on a firm's behavior or, conversely, what power a firm can have over the market. The interaction between the firm and the market depends critically on the structure of the market or types of market structure.

"Market structure" refers to the nature of firms' competition and the existence of monopoly power, as well as the degree of their influence on the decisions made by firms.
Main questions of the lecture:
Types of market structures.
Market characteristics perfect competition.
Activity competitive firm V short term.
Firm and industry equilibrium in long term.
Perfect competition and economic efficiency.
10.1. Types of Market Structures
One of the most important factors dictating General terms the functioning of markets is the degree of development of competitive relations in it. Market competition is the struggle for limited consumer demand, waged between firms in the parts of the market available to them.
The division of market structures into various types is based on a number of parameters that determine the characteristics of an industry market. These are: 1) the number of sellers and their market shares, 2) the degree of product differentiation, 3) the conditions for entry into and exit from the industry, 4) the degree of control of producers over prices, 5) the nature of the behavior of firms. Depending on the content of each feature and their combination, various types of industry markets are formed, characterized by varying degrees of competitiveness.
IN economic science The following types of market structures are distinguished.
Perfect competition is a type of competition in which firms do not have market power and compete on price. Its characteristic feature is that sellers cannot increase their income by raising prices and the only way available to them to obtain economic profit is
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is to reduce production costs, and perfect competition becomes a condition for ensuring maximum efficiency of the economy.
Imperfect competition is a type of economy in which firms have market power and compete on the basis of sales. This type of competition represents the way firms that have different sizes and costs, distinctive product characteristics and different goals compete, and also use different competitive strategies. His distinctive feature is the use of predominantly non-price methods of competition. Meet different kinds imperfect competition:
Pure monopoly. A market is considered absolutely monopoly if there is a single manufacturer of a product in it, and there are no close substitutes for this product in other industries.

Consequently, in a pure monopoly, the boundaries of the industry and the boundaries of the firm coincide.
Monopolistic competition. This market structure has some similarities to perfect competition, except that the industry produces similar but not identical products. Product differentiation gives firms an element of monopoly power over the market.
Monopsony. A market situation when there is only one buyer. The monopsony power of the buyer leads to the fact that he is the creator of the price.
A monopoly that practices discrimination. Typically, this refers to the practice of companies that consists of assigning different prices to different buyers for one product.
Bilateral monopoly. A market in which one buyer, who has no competitors, is opposed by one seller - a monopolist.
Duopoly. A market structure in which only two firms operate. A special case of oligopoly.
Oligopoly. A market situation in which a small number of large firms produce the bulk of an industry's output. In such a market, firms are aware of the interdependence of their sales, production volumes, investments and advertising activities.
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10.2. Characteristics of a perfectly competitive market
For perfect competition to exist, the following conditions must be met.
A large number of relatively small producers and buyers. At the same time, the purchases made by the consumer (or sales by the seller) are so small compared to the total volume of the market that the decision to reduce or increase their volumes does not create either surpluses or shortages.
Absolute mobility of material, financial, labor and other factors of production in the long term. This means that resources are completely mobile and can be easily moved from one activity to another. The absence of barriers means absolute flexibility and adaptability of a perfectly competitive market.
Full awareness of all competitors about market conditions. There are no trade secrets, unpredictable developments of events, unexpected actions of competitors. That is, decisions are made by the company in conditions of complete certainty regarding the market situation.
Absolute homogeneity of goods of the same name. Since firms' products are indistinguishable, no buyer is willing to pay a higher price to a firm than it would to its competitors. If any of the sellers raises the price, then buyers instantly leave him and buy goods from his competitors. Since the prices are the same, buyers do not care which company's products they buy.
No participant in free competition can influence the decisions made by other participants. Since the number market subjects is very large, the contribution of each producer to the total production volume is negligible, as is the demand of an individual consumer. This means that each of them individually is not able to influence the price of the product. They form the market price only through joint actions.
Thus, in the model of perfect competition, the market price is the independent variable, and the firm under these conditions is often called the price taker. Her choice comes down to making a decision on the size of output.
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Under conditions of perfect competition, the demand curve for a firm's product will look like a horizontal line. From an economic point of view, a price line parallel to the x-axis means absolute elasticity of demand. The presence of absolutely elastic demand for a firm's products is usually called the criterion of perfect competition. As soon as such a situation develops in the market, the company begins to behave like (or almost like) a perfect competitor.
A direct consequence of fulfilling the criterion of perfect competition is that average income for any volume of output is equal to the price of the product and that marginal revenue is always at the same level.
10.3. Activities of a competitive firm in the short run
Fundamental options for the company's behavior. For
A firm operating in the short term has three fundamental options for behavior: production for the sake of maximizing profits; production to minimize losses; cessation of production.
Profit maximization occurs when price exceeds average total costs (P>ATCmin). The price (P) exceeds the minimum value of average total costs (ATCmin), so it is fundamentally possible to make a profit.
The second option - minimizing losses - is implemented when the market price of the enterprise's products is greater than the minimum value of average variable costs, but less than the minimum value of average total costs, i.e.
(ATStsh > P > AVCmin). If a firm stops production (even temporarily), it will have to pay fixed costs without attracting any current revenue. This means that the losses will be equal full size fixed costs and will exceed the value that they would have if production were maintained. That is why the company continues to produce products and suffers losses, only minimizing them.
In the case when the market price of a product is below the minimum value of average variable costs (R 72
Indeed, this price not only does not cover all costs, it is not able to fully cover variable costs. That is, each released unit, in addition to the inevitable loss in the amount of fixed costs, also adds the uncovered part of the variable costs associated with the release of this product. Under these conditions, the greater the production, the greater the losses.
Profit maximization and the MC = MR rule. The choice of a fundamental course of action is only the first step of a company in optimizing its position in the market. The next step is to accurately determine the volume of production that maximizes profit or (at less favorable conditions) minimizes losses. Note that the profit maximization rule MR = MC is valid not only for conditions of perfect competition, but also for other types of markets.
Under perfect competition, marginal revenue is equal to the price of the product. Therefore, the rule MR = MC can be presented in another form:
P = MR = MS, or P = MS.
That is, under conditions of perfect competition, profit maximization is achieved at a volume of production corresponding to the point of equality marginal cost and prices.
10.4. Equilibrium of the firm and industry in the long run
Entry into and exit from a perfectly competitive market is open to all firms without exception. Therefore, in the long term, the level of profitability becomes the regulator of the resources used in the industry. If the level of market prices established in an industry is higher than the minimum average cost, then the possibility of obtaining economic profits will serve as an incentive for new firms to enter this industry. The absence of barriers to their path will lead to the fact that an increasing share of resources will be allocated to the production of this type of goods. Conversely, economic losses will act as a disincentive, scaring away entrepreneurs and reducing the amount of resources used in the industry.
The relationship between the level of profitability in competitive industry and the size of the use of resources in it, and therefore
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supply volume, predetermines the break-even of firms operating in a competitive industry in the long term (or their receipt of zero economic profit).
Let there initially be an equilibrium in a competitive industry that dictates a certain price level at which the firm earns zero profit in the short run. Let’s assume that the demand for the industry’s products suddenly increases. The industry demand curve in this situation will shift to the right, and a new short-term equilibrium will be established in the industry. For the company, the new increased price level will become a source of economic profits. Economic profits will attract new producers to the industry. The consequence of this will be the formation of a new supply curve, shifted to the right compared to the original one. A new, slightly lower price level will also be established. If economic profits remain at this price level, then the influx of new firms will continue, and the supply curve will shift even more to the right. In parallel with the influx of new firms into the industry, supply in the industry will increase under the influence of the expansion of production capacity by firms already operating in the industry. Obviously, both of these processes will continue until the supply curve reaches a position that 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 already in reverse direction) is also deployed in the event of economic losses: reduction in demand; price drop; the emergence of economic losses for firms; outflow of firms and resources from the industry; reduction in long-term market supply; price increase; restoration of break-even; stopping the outflow of firms and resources from the industry.
Thus, perfect competition has a unique self-regulation mechanism. Its essence is that the industry reacts flexibly to changes in demand. It attracts a volume of resources that increases or decreases supply just enough to compensate for changes in demand. And on this basis it ensures long-term break-even for companies.
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To summarize, we can say that the long-term equilibrium established in the industry satisfies three conditions:
the conditions for short-term equilibrium are met, i.e. short-run marginal cost equals short-run marginal revenue and price (P = MR = MC);
each of the firms is satisfied with the volume of used production capacity (short-term average total costs are equal to the lowest possible long-term average costs (ATC = LATC);
min min
the company receives zero economic profit, i.e. excess profits are not generated, and therefore there are no firms willing to enter or leave the industry (P = ATCmin).
All these three conditions for long-term equilibrium can be represented in the following generalized form:
P = MR = MC = ATC. =LATC.
min min
10.5. Perfect competition and economic efficiency
Analyzing the above condition of long-term equilibrium, we can highlight the following positive features of a perfectly competitive market:
1. Production in conditions of perfect competition is organized in the most technologically efficient way. This is determined by the fact that equilibrium is established at the level of long-term and short-term minimum average costs.
1. The company and industry operate without surpluses or deficits. In fact, the demand curve under perfect competition coincides with the marginal revenue curve (D = MR), and the supply curve coincides with the marginal cost curve (S = MC). Therefore, the condition of long-term equilibrium in a competitive industry is actually equivalent to the identity of supply and demand for a given product (since MR = MC, then D = S). Consequently, we can say that perfect competition leads to optimal allocation of resources: the industry involves them in production exactly in the volume that is necessary to cover effective demand.
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2. Break-even of firms in the long term (P = LATC.). This, on the one hand, guarantees the stability of the industry - firms do not incur losses. On the other hand, there are no economic profits, i.e. income is not redistributed in favor of this industry from other sectors of the economy.
The combination of these advantages makes perfect competition one of the most effective types of markets. Strictly speaking, when we talk about self-regulation of the market, which automatically brings the economy to an optimum state, we are talking about perfect competition.
However, perfect competition is not without a number of disadvantages:
Small businesses typical of this type of market often find themselves unable to take advantage of the most effective technique. The fact is that economies of scale in production are often available only to large firms.
A perfectly competitive market does not stimulate scientific and technical progress. For small companies there are usually insufficient funds to finance lengthy and expensive research and development activities.
Thus, for all its advantages, the perfectly competitive market should not be an object of idealization. The small size of companies operating in a perfectly competitive market makes it difficult for them to operate in a modern, saturated with large-scale technology and permeated innovation processes world.
Key words and concepts
Perfect competition, imperfect competition, monopolistic competition, oligopoly, monopoly, duopoly, monopsony, demand curve for the products of a competitive firm, long-run equilibrium position.
Self-test and review questions
What are the criteria for a perfectly competitive market?
Why is the demand curve for a competitive firm's product a horizontal line, but the demand curve for everything competitive market has a negative slope?
What are the fundamental options for the company's behavior in the short and long term?
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What are the ways for businesses to reach the break-even point?
Firms that produce at a loss must immediately close down. Is this always true?
Under what conditions does a competitive firm reach equilibrium?
Explain whether competitive firms can grow if they earn zero profits in the long run?
What role does the absence of barriers in a perfectly competitive market play in establishing zero economic profit in the long run?
Explain at what level of output a competitive firm will achieve optimal scale in the long run?
Can perfect competition be considered the most efficient type of market?
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The considered behavior of the company is typical for a short-term period. However, the entrepreneur is interested not only in the immediate result, but also in the prospects for the development of the enterprise. Obviously, in the long run the company also proceeds from the task of maximizing profit.

The long-term period differs from the short-term period in that, firstly, the manufacturer can increase production capacity(so all costs become variable) and secondly, the number of firms in the market can change. In conditions of perfect competition, entry and exit of new firms into the market is absolutely free. Therefore, in the long term, the level of profit becomes a regulator of attracting new capital and new firms to the industry.

If the market price established in the industry is higher than the minimum average cost, then the possibility of obtaining economic profit will serve as an incentive for new firms to enter the industry. As a result, industry supply will increase (S → S1), and the price will decrease (P > P 1), as shown in Fig. 8.11. Conversely, if firms suffer losses (at prices below minimum average cost), this will lead to many of them closing and capital flowing out of the industry. As a result, industry supply will decrease (S → S 2), which will lead to an increase in price (P → P 2 ).

The process of entry and exit of firms will stop only when there is no economic profit. A firm making zero profit has no incentive to exit the business, and other firms have no incentive to enter the business. There is no economic profit when price equals minimum average cost. P = ATS type. In this case we are talking about long-term average costs LAC.

Long Run Average Cost LAC (long average costs) are the costs of producing a unit of output in the long run. Every point L.A.C. corresponds to the minimum short-term unit costs ATS for any size of enterprise (volume of output). The nature of the long-term cost curve is associated with the concept of economies of scale, which describes the relationship between the scale of production and the magnitude of costs (economies of scale were discussed in the previous chapter). The minimum long-term cost is determined by optimal size enterprises. If the price is equal to the minimum long-run unit cost, the firm's long-run profit is zero.

Rice. 8.11. Change industry offer

Thus, the condition for the long-term equilibrium of the firm is that the price is equal to the minimum of long-term unit costs RE = = LAC min (Fig. 8.12).

Rice. 8.12. Long-run equilibrium of the firm

Production at minimum average cost means production at the most efficient combination of resources, i.e. firms make the best use of factors of production and technology. This is certainly a positive phenomenon, especially for the consumer. It means that the consumer receives the maximum volume of output at the lowest price allowed by unit costs.

A firm's long-run supply curve, like its short-run supply curve, is part of its long-run marginal cost curve. L.M.C. located above point E - the minimum long-term unit costs LAC min. The industry supply curve is obtained by summing the long-term supply volumes of individual firms. However, unlike the short-term period, the number of firms in the long-term may change.

So, in the long run in a perfectly competitive market, the price of a product tends to minimize average costs, and this, in turn, means that when long-run industry equilibrium is achieved, the economic profit of each firm will be zero.

At first glance, the correctness of this conclusion can be doubted: after all, individual firms can use unique production factors, such as soils of increased fertility, highly qualified specialists, and modern technology that allows them to produce products with less materials and time.

Indeed, the resource costs per unit of output of competing firms may differ, but their economic costs will be the same. The latter is explained by the fact that in conditions of perfect competition in the factor market, a firm will be able to acquire a factor with increased productivity if it pays for it a price that raises the firm’s costs to the general level in the industry. Otherwise, this factor will be purchased by a competitor.

If the firm already has unique resources, then the increased price should be taken into account as an opportunity cost, because at that price the resource could be sold.

What motivates firms to enter an industry if long-run economic profits are zero? It all depends on the possibility of obtaining high short-term profits. To provide such an opportunity, by changing the situation of short-term equilibrium, the impact of external factors, in particular changes in demand. Increased demand will bring short-term economic benefits. In the future, the action will develop according to the scenario already described above.

Let's consider the consequences of changes in demand, provided that prices for resources remain unchanged (Fig. 8.13, a), prices for resources increase (Fig. 8.13, b), prices for resources decrease (Fig. 8.13, c).

Rice. 8.13. Industry supply in the long run

If after reaching equilibrium (point E 1) industry demand will increase ( D 1 → D 2), then initially the price will rise from P 1 before P 2. At this price, firms will begin to earn economic profit, which will lead to an increase in supply in the industry both due to the expansion of production in individual firms and due to the arrival of new firms (in the figure this will be reflected by the shift S1 → S2). As a result, the price will again decrease to the level P 1, since the minimum LAC is equal to this value. Equilibrium in the industry will be established at the point E). If demand decreases (D2 > D1). then the price will decrease from P 1 before R 2. At this price, firms will be at a loss, some of them will close and move to other industries. Market supply will decrease (S2 → S 1). Industry equilibrium will be restored at the point E 1 (see Fig. 8.13, a).

Thus, perfect competition has a unique self-regulation mechanism. Its essence is that the industry reacts flexibly to changes in demand. It attracts a volume of resources that increases or decreases supply just enough to compensate for changes in demand, and on this basis ensures the long-term break-even of firms operating in the industry.

If we connect two industry equilibrium points in the long run at various combinations aggregate demand and aggregate supply (in Fig. 8.13, and these are points E 1 And E 2), then the industry supply line in the long run is formed - S1. Since we have assumed that factor prices are constant, line S1 runs parallel to the x-axis. This is not always the case. There are industries in which resource prices increase or decrease.

Most industries use specific resources, the number of which is limited. Their use determines the ascending nature of costs in this industry. The entry of new firms will lead to an increase in demand for resources, the emergence of their shortage and, as a result, an increase in prices. As each new firm enters the market, scarce resources will become more and more expensive. Therefore, the industry will only be able to produce more products at a higher price. This will cause a shift in the S1 curve (Fig. 8.13, b). Market equilibrium will be established at a new point E 2.

Finally, there are industries in which, as the volume of a resource used increases, its price decreases. In this case, the minimum average cost is also reduced. Under such conditions, an increase in industry demand will cause in the long run not only an increase in supply, but also a decrease in the equilibrium price. Curve S 1 will have a negative slope (Fig. 8.13, c). The new long-term equilibrium will be established at the point E 3.

In any case, in the long run, the industry supply curve will be flatter than the short-run supply curve. This is explained as follows. Firstly, the ability to use all resources in the long term allows you to more actively influence price changes, therefore for each individual firm, and therefore for the industry as a whole, the supply curve will be more elastic. Secondly, the possibility of “new” firms entering the industry and “old” firms exiting the industry allows the industry to to a greater extent than in the short term to respond to changes in market prices.

Consequently, output will increase or decrease by a greater amount in the long run than in the short run in response to an increase or decrease in price. In addition, the minimum point of the industry's long-term supply price is higher than the minimum point of the short-term supply price, since all costs are variable and must be recovered.

So, in the long run, under conditions of perfect competition, the following will happen:

a) the equilibrium price will be established at the level of minimum long-term average costs R E = LAC min which will ensure long-term break-even for firms;
b) the supply curve of a competitive industry is a line passing through the break-even points (minimum average costs) for each level of production;
c) with a change in demand for industry products, the equilibrium price may remain unchanged, decrease or increase, depending on how prices for production factors change. The industry supply curve will look like a horizontal straight line (parallel to the x-axis), ascending or descending line.

A perfectly competitive market is characterized by the following features:

The firms' products are homogeneous, so consumers don’t care which manufacturer they buy it from. All goods in the industry are perfect substitutes, and the cross price elasticity of demand for any pair of firms tends to infinity:

This means that any, no matter how small, increase in price by one manufacturer above the market level leads to a reduction in demand for its products to zero. Thus, the difference in prices may be the only reason for preferring one or another company. Non-price competition absent.

The number of economic entities on the market is unlimited, and their specific gravity so small that the decisions of an individual firm (individual consumer) to change the volume of its sales (purchases) do not affect the market price product. This, of course, assumes that there is no collusion between sellers or buyers to obtain monopoly power in the market. The market price is the result of the joint actions of all buyers and sellers.

Freedom of entry and exit on the market. There are no restrictions or barriers - there are no patents or licenses limiting activities in this industry, significant initial capital investments are not required, the positive effect of scale of production is extremely insignificant and does not prevent new firms from entering the industry, there is no government intervention in the mechanism of supply and demand (subsidies , tax benefits, quotas, social programs, etc.). Freedom of entry and exit presupposes absolute mobility of all resources, freedom of their movement geographically and from one type of activity to another.

Perfect knowledge all market entities. All decisions are made with certainty. This means that all firms know their revenue and cost functions, the prices of all resources and all possible technologies, and all consumers have complete information about the prices of all firms. It is assumed that information is distributed instantly and free of charge.

These characteristics are so strict that there are practically no real markets that fully satisfy them.

However, the perfect competition model:

allows you to explore markets in which a large number of small firms sell homogeneous products, i.e. markets similar in terms of conditions to this model;

clarifies the conditions for maximizing profits;
is the standard for assessing the performance of the real economy.

Short-run equilibrium of a firm under perfect competition

Demand for a perfect competitor's product

Under conditions of perfect competition, the prevailing market price is established through the interaction of market demand and market supply, as shown in Fig. 1, and determines the horizontal demand curve and average revenue (AR) for each individual firm.

Rice. 1. Demand curve for a competitor’s products

Due to product homogeneity and availability large quantity perfect substitutes, no firm can sell its product at a price even slightly higher than the equilibrium price, Re. On the other hand, an individual firm is very small compared to the total market, and it can sell all its output at the price Pe, i.e. she has no need to sell the goods at a price below Re. Thus, all firms sell their products at the market price Pe, determined by market supply and demand.

The income of a firm that is a perfect competitor

The horizontal demand curve for the products of an individual firm and a single market price (P=const) predetermine the shape of income curves under conditions of perfect competition.

1. Total income () - total value income received by the company from the sale of all its products,

represented on the graph by a linear function that has a positive slope and originates at the origin, since any unit of output sold increases volume by an amount equal to the market price!!Re??.

2. Average income () - income from the sale of a unit of production,

is determined by the equilibrium market price!!Re??, and the curve coincides with the firm's demand curve. A-priory

3. Marginal Revenue() - additional income from the sale of one additional unit of output,

Marginal revenue is also determined by the current market price for any volume of output.

A-priory

All income functions are presented in Fig. 2.

Rice. 2. Income of a competing company

Determining the optimal output volume

In perfect competition, the current price is set by the market, and an individual firm cannot influence it because it is price taker. Under these conditions, the only way to increase profits is to regulate output.

Based on the market and technological conditions existing at a given time, the company determines optimal output volume, i.e. volume of output providing the company profit maximization(or minimization if making a profit is impossible).

There are two interrelated methods for determining the optimum point:

1. Total cost - total income method.

The firm's total profit is maximized at the level of output where the difference between and is as large as possible.

n=TR-TC=max

Rice. 3. Determination of the optimal production point

In Fig. 3, the optimizing volume is located at the point where the tangent to the TC curve has the same slope as the TR curve. The profit function is found by subtracting TC from TR for each volume of production. The peak of the total profit curve (p) shows the level of output at which profit is maximized in the short run.

From the analysis of the total profit function it follows that total profit reaches its maximum at the volume of production at which its derivative is equal to zero, or

dп/dQ=(п)`= 0.

The derivative of the total profit function has a strictly defined economic sense is the marginal profit.

Marginal profit ( MP) shows the increase in total profit when the volume of output changes by one unit.

If Mn>0, then the total profit function grows, and additional production can increase total profits.
If MP<0, то функция совокупной прибыли уменьшается, и дополнительный выпуск сократит совокупную прибыль.
And finally, if Mn=0, then the value of the total profit is maximum.

From the first condition of profit maximization ( MP=0) the second method follows.

2. Marginal cost-marginal revenue method.

Мп=(п)`=dп/dQ,
(n)`=dTR/dQ-dTC/dQ.

And since dTR/dQ=MR, A dTC/dQ=MS, then total profit reaches its greatest value at such a volume of output at which marginal costs are equal to marginal revenue:

If marginal costs are greater than marginal revenue (MC>MR), then the enterprise can increase profits by reducing production volume. If marginal cost is less than marginal revenue (MC<МR), то прибыль может быть увеличена за счет расширения производства, и лишь при МС=МR прибыль достигает своего максимального значения, т.е. устанавливается равновесие.

This equality valid for any market structure, but in conditions of perfect competition it is slightly modified.

Since the market price is identical to the average and marginal revenues of a firm - a perfect competitor (PAR = MR), the equality of marginal costs and marginal revenues is transformed into the equality of marginal costs and prices:

Example 1. Finding the optimal output volume under conditions of perfect competition.

The firm operates in conditions of perfect competition. Current market price P = 20 USD The total cost function has the form TC=75+17Q+4Q2.

It is necessary to determine the optimal output volume.

Solution (1 way):

To find the optimal volume, we calculate MC and MR and equate them to each other.

1. МR=P*=20.
2. MS=(TS)`=17+8Q.
3. MC=MR.
20=17+8Q.
8Q=3.
Q=3/8.

Thus, the optimal volume is Q*=3/8.

Solution (2 way):

The optimal volume can also be found by equating the marginal profit to zero.

1. Find the total income: TR=Р*Q=20Q
2. Find the total profit function:
n=TR-TC,
n=20Q-(75+17Q+4Q2)=3Q-4Q2-75.
3. Define the marginal profit function:
MP=(n)`=3-8Q,
and then equate MP to zero.
3-8Q=0;
Q=3/8.

Solving this equation, we got the same result.

Condition for obtaining short-term benefits

The total profit of an enterprise can be assessed in two ways:

P=TR-TC;
P=(P-ATS)Q.

If we divide the second equality by Q, we get the expression

characterizing the average profit, or profit per unit of output.

It follows from this that whether a firm obtains profits (or losses) in the short term depends on the ratio of its average total costs (ATC) at the point of optimal production Q* and the current market price (at which the firm, a perfect competitor, is forced to trade).

The following options are possible:

if P*>ATC, then the firm has positive economic profit in the short term;

Positive economic profit

In the presented figure, the volume of total profit corresponds to the area of the shaded rectangle, and average profit(i.e. profit per unit of output) is determined by the vertical distance between P and ATC. It is important to note that at the optimum point Q*, when MC = MR, and the total profit reaches its maximum value, n = max, the average profit is not maximum, since it is determined not by the ratio of MC and MR, but by the ratio of P and ATC.

if P*<АТС, то фирма имеет в краткосрочном периоде отрицательную экономическую прибыль (убытки);

Negative economic profit (loss)

if P*=ATC, then economic profit is zero, production is break-even, and the firm receives only normal profit.

Zero economic profit

Condition for cessation of production activities

In conditions when the current market price does not bring positive economic profit in the short term, the company faces a choice:

or continue unprofitable production,
or temporarily suspend its production, but incur losses in the amount of fixed costs ( F.C.) production.

The company makes a decision on this issue based on the ratio of its average variable cost (AVC) and market price.

When a firm decides to close, its total revenues ( TR) fall to zero, and the resulting losses become equal to its total fixed costs. Therefore, until price is greater than average variable cost

P>АВС,

company production should continue. In this case, the income received will cover all variables and at least part of the fixed costs, i.e. losses will be less than at closure.

If price equals average variable cost

then from the point of view of minimizing losses to the company indifferent, continue or cease its production. However, most likely the company will continue to operate in order not to lose its customers and preserve the jobs of its employees. At the same time, its losses will not be higher than at closure.

And finally, if prices are less than average variable costs then the company should cease operations. In this case, she will be able to avoid unnecessary losses.

Condition for termination of production

Let us prove the validity of these arguments.

A-priory, n=TR-TC. If a firm maximizes its profit by producing the nth number of products, then this profit ( pn) must be greater than or equal to the profit of the company in conditions of closure of the enterprise ( By), because otherwise the entrepreneur will immediately close his enterprise.

In other words,

Thus, the firm will continue to operate only as long as the market price is greater than or equal to its average variable cost. Only under these conditions will the company minimize its losses in the short term by continuing its activities.

Interim conclusions for this section:

Equality MS=MR, as well as equality MP=0 show the optimal output volume (i.e., the volume that maximizes profits and minimizes losses for the company).

The relationship between price ( R) and average total costs ( ATS) shows the amount of profit or loss per unit of output if production continues.

The relationship between price ( R) and average variable costs ( AVC) determines whether or not it is necessary to continue activities in the event of unprofitable production.

Short-run supply curve of a competing firm

A-priory, supply curve reflects the supply function and shows the quantity of goods and services that producers are willing to offer to the market at given prices, at a given time and place.

To determine the shape of the short-run supply curve for a perfectly competitive firm,

Competitor's supply curve

Suppose the market price is Ro, and the average and marginal cost curves look like in Fig. 4.8.

Because the Ro(closing point), then the firm’s supply is zero. If the market price rises to more than high level, then the equilibrium production volume will be determined by the relation M.C. And M.R.. The very point of the supply curve ( Q;P) will lie on the marginal cost curve.

By successively increasing the market price and connecting the resulting dots, we get the short-run supply curve. As can be seen from the presented Fig. 4.8, for a perfect competitor firm, the short-run supply curve coincides with its marginal cost curve ( MS) above the minimum level of average variable costs ( AVC). At lower than min AVC level of market prices, the supply curve coincides with the price axis.

Example 2. Definition of a sentence function

It is known that a perfect competitor firm has total (TC) and total variable (TVC) costs represented by the following equations:

TS=10+6 Q-2 Q 2 +(1/3) Q 3 , Where TFC=10;
TVC=6 Q-2 Q 2 +(1/3) Q 3 .

Determine the supply function of a firm under perfect competition.

1. Find MS:

MS=(TS)`=(VC)`=6-4Q+Q 2 =2+(Q-2) 2 .

2. Let us equate MC to the market price (condition of market equilibrium under perfect competition MC=MR=P*) and obtain:

2+(Q-2) 2 = P or

Q=2(P-2) 1/2 , If R2.

However, from the previous material we know that the volume of supply Q = 0 at P

Q=S(P) at Pmin AVC.

3. Determine the volume at which average variable costs are minimal:

min AVC=(TVC)/ Q=6-2 Q+(1/3) Q 2 ;
(AVC)`= dAVC/ dQ=0;
-2+(2/3) Q=0;
Q=3,

those. Average variable costs reach their minimum at a given volume.

4. Determine what min AVC is equal to by substituting Q=3 into the min AVC equation.

min AVC=6-2(3)+(1/3)(3) 2 =3.

5. Thus, the firm’s supply function will be:

Q=2+(P-2) 1/2 ,If P3;
Q=0 if R<3.

Long-run market equilibrium under perfect competition

Long term

So far we have considered the short-term period, which assumes:

the existence of a constant number of firms in the industry;
the presence of enterprises with a certain amount of permanent resources.

In the long term:

all resources are variable, which means that it is possible for a company operating in the market to change the size of production, introduce new technology, or modify products;
change in the number of enterprises in the industry (if the profit received by the company is lower than normal and negative forecasts for the future prevail, the enterprise may close and leave the market, and vice versa, if the profit in the industry is high enough, an influx of new companies is possible).

Basic assumptions of the analysis

To simplify the analysis, let us assume that the industry consists of n typical enterprises with same cost structure, and that a change in the output of existing firms or a change in their number do not affect resource prices(we will remove this assumption later).

Let the market price P1 determined by the interaction of market demand ( D1) and market supply ( S1). The cost structure of a typical company in the short term looks like curves SATC1 And SMC1(Fig. 4.9).

Rice. 9. Long-run equilibrium of a perfectly competitive industry

Mechanism for the formation of long-term equilibrium

Under these conditions, the firm's optimal output in the short run will be q1 units. Production of this volume provides the company with positive economic profit, since the market price (P1) exceeds the firm's average short-term costs (SATC1).

Availability short-term positive profit leads to two interrelated processes:

on the one hand, a company already operating in the industry strives expand your production and receive economies of scale in the long term (according to the LATC curve);
on the other hand, external firms will begin to show interest in penetration into this industry(depending on the amount of economic profit, the penetration process will proceed at different speeds).

The emergence of new firms in the industry and the expansion of the activities of old ones shifts the market supply curve to the right to the position S2(as shown in Fig. 9). The market price decreases from P1 before P2, and the equilibrium volume of industry production will increase from Q1 before Q2. Under these conditions, the economic profit of a typical firm falls to zero ( P=SATC) and the process of attracting new companies to the industry is slowing down.

If for some reason (for example, the extreme attractiveness of initial profits and market prospects) a typical firm expands its production to level q3, then the industry supply curve will shift even further to the right to the position S3, and the equilibrium price will fall to the level P3, lower than min SATC. This will mean that firms will no longer be able to make even normal profits and a gradual decline will begin. outflow of companies into more profitable areas of activity (as a rule, the least effective ones go).

The remaining enterprises will try to reduce their costs by optimizing sizes (i.e. by slightly reducing the scale of production to q2) to the level at which SATC=LATC, and it is possible to obtain a normal profit.

Shift of the industry supply curve to the level Q2 will cause the market price to rise to P2(equal to the minimum value of long-term average costs, Р=min LAC). At a given price level, a typical firm makes no economic profit ( economic profit is zero, n=0), and is only capable of extracting normal profit. Consequently, the motivation for new firms to enter the industry disappears and a long-term equilibrium is established in the industry.

Let's consider what happens if the equilibrium in the industry is upset.

Let the market price ( R) has established itself below the long-term average costs of a typical firm, i.e. P. Under these conditions, the company begins to incur losses. There is an outflow of firms from the industry, a shift in market supply to the left, and while market demand remains unchanged, the market price rises to the equilibrium level.

If the market price ( R) is set above the average long-term costs of a typical firm, i.e. P>LAТC, then the firm begins to receive positive economic profit. New firms enter the industry, market supply shifts to the right, and with constant market demand, the price drops to the equilibrium level.

Thus, the process of entry and exit of firms will continue until a long-run equilibrium is established. It should be noted that in practice the regulatory forces of the market work better to expand than to contract. Economic profit and freedom to enter the market actively stimulate an increase in industry production volumes. On the contrary, the process of squeezing firms out of an overexpanded and unprofitable industry takes time and is extremely painful for the participating firms.

Basic conditions for long-term equilibrium

Operating firms make the best use of the resources at their disposal. This means that each firm in the industry maximizes its profit in the short run by producing the optimal output at which MR=SMC, or since the market price is identical to marginal revenue, P=SMC.
There are no incentives for other firms to enter the industry. The market forces of supply and demand are so strong that firms are unable to extract more than is necessary to keep them in the industry. those. economic profit is zero. This means that P=SATC.
Firms in the industry cannot reduce total average costs in the long run and make a profit by expanding the scale of production. This means that to earn normal profits, a typical firm must produce a level of output that corresponds to the minimum of long-run average total costs, i.e. P=SATC=LATC.

In long-term equilibrium, consumers pay the minimum economically possible price, i.e. the price required to cover all production costs.

Market supply in the long run

The long-run supply curve of an individual firm coincides with the increasing portion of LMC above min LATC. However, the market (industry) supply curve in the long run (as opposed to the short run) cannot be obtained by horizontally summing the supply curves of individual firms, since the number of these firms varies. The shape of the market supply curve in the long run is determined by how prices for resources in the industry change.

At the beginning of the section, we introduced the assumption that changes in industry production volumes do not affect resource prices. In practice, there are three types of industries:

With fixed costs;
with increasing costs;
with decreasing costs.

Fixed Cost Industries

The market price will rise to P2. The optimal output of an individual firm will be Q2. Under these conditions, all firms will be able to earn economic profits, inducing other companies to enter the industry. The sectoral short-term supply curve moves to the right from S1 to S2. The entry of new firms into the industry and the expansion of industry output will not affect resource prices. The reason for this may be that resources are abundant, so that new firms will not be able to influence resource prices and increase the costs of existing firms. As a result, the LATC curve of a typical firm will remain the same.

Restoring balance is achieved by following diagram: the entry of new firms into the industry causes the price to fall to P1; profits are gradually reduced to the level of normal profits. Thus, industry output increases (or decreases) following changes in market demand, but the supply price in the long run remains unchanged.

This means that a fixed cost industry looks like a horizontal line.

Industries with increasing costs

If an increase in industry volume causes an increase in resource prices, then we are dealing with the second type of industry. The long-term equilibrium of such an industry is shown in Fig. 4.9 b.

A higher price allows firms to make an economic profit, which attracts new firms to the industry. The expansion of aggregate production necessitates an ever-increasing use of resources. As a result of competition between firms, prices for resources increase, and as a result, the costs of all firms (both existing and new) in the industry increase. Graphically, this means an upward shift in the marginal and average cost curves of a typical firm from SMC1 to SMC2, from SATC1 to SATC2. The firm's short-run supply curve also shifts to the right. The process of adaptation will continue until economic profit runs out. In Fig. 4.9, the new equilibrium point will be the price P2 at the intersection of the demand curves D2 and supply S2. At this price, a typical firm chooses a production volume at which

P2=MR2=SATC2=SMC2=LATC2.

The long-run supply curve is obtained by connecting the short-run equilibrium points and has a positive slope.

Industries with decreasing costs

The analysis of long-term equilibrium of industries with decreasing costs is carried out according to a similar scheme. Curves D1, S1 are the initial curves of market demand and supply in the short term. P1 is the initial equilibrium price. As before, each firm reaches equilibrium at point q1, where the demand curve - AR-MR touches min SATC and min LATC. In the long run, market demand increases, i.e. the demand curve shifts to the right from D1 to D2. The market price increases to a level that allows firms to make an economic profit. New companies begin to flow into the industry, and the market supply curve shifts to the right. Expanding production volumes leads to lower prices for resources.

This is a rather rare situation in practice. An example would be a young industry emerging in a relatively undeveloped area, where the resource market is poorly organized, marketing is at a primitive level, and transport system functions poorly. An increase in the number of firms can increase the overall efficiency of production, stimulate the development of transport and marketing systems, and reduce the overall costs of firms.

External savings

Due to the fact that an individual company cannot control such processes, this kind of cost reduction is called external economy(eng. external economies). It is caused solely by industry growth and forces beyond the control of the individual firm. External economies should be distinguished from the already known internal economies of scale, achieved by increasing the scale of the firm’s activities and completely under its control.

Taking into account the factor of external savings, the total cost function of an individual firm can be written as follows:

TCi=f(qi,Q),

Where qi- volume of output of an individual company;

Q— the volume of output of the entire industry.

In industries with constant costs, there are no external economies; the cost curves of individual firms do not depend on the industry's output. In industries with increasing costs, negative external diseconomies take place; the cost curves of individual firms shift upward with increasing output. Finally, in industries with decreasing costs, there are positive external economies that offset the internal diseconomies due to diminishing returns to scale, so that the cost curves of individual firms shift downward as output increases.

Most economists agree that in the absence of technological progress, the most typical industries are those with increasing costs. Industries with decreasing costs are the least common. As industries grow and mature, industries with decreasing and constant costs are likely to become industries with increasing costs. On the contrary, technological progress can neutralize the rise in resource prices and even lead to their fall, which will result in the emergence of a downward-sloping long-term supply curve. An example of an industry in which costs are reduced as a result of scientific and technical progress is the production of telephone services.

Neoclassical theory states that the main goal of most firms in a market economy is to obtain maximum gross profit- the difference between the gross (total) income or proceeds received by the company from the sale of products and its gross (total) production costs.

Total (gross) income (TR) is the income (gross revenue) received from the sale of all the company's products: The total income of competitive and non-competitive firms is presented in Figure 3.1. and 3.2.

Figure 3.1. Total income Figure 3.2. The total (revenue) of a competitive firm is the income of a monopolist

A firm operating in a perfectly competitive market(competitive firm, Fig. 3.1) does not have the ability to influence the price. The price for it is the value set by the market. Therefore, the company will sell any volume of product at a single market price. Since the firm's market share is infinitesimal, the firm does not need to lower its price in order to sell more. Total income ( TR) entirely depends only on the volume of production of the company, that is, revenue TR is equal to the price multiplied by the quantity sold(straight ascending line in Fig. 3.1).

A firm operating in an imperfectly competitive market(For example, monopolist, rice. 3.2), may affect price, installing it myself. However, in order to sell more products, it is forced reduce the price, moving down the demand curve. That's why total income (gross revenue) the monopolist, with an increase in sales volume will increase, but by an ever smaller amount, then will reach its maximum and further increase in sales will become meaningless, since revenue will begin to decline(Figure 3.2).

It is important that the TR monopolist's revenue increases when the price decreases only as long as the demand for the product is price elastic. Monopolist revenue TR reaches a maximum when marginal revenue (MR) becomes zero. Once demand becomes price inelastic, a further reduction in price leads to a fall in the gross income (revenue) of the monopolist(and any firm operating in an imperfectly competitive market).

Average income(AR) is the income received from the sale of a unit of production. The average income of a competitive firm is equal to the price of a unit of product AR = TR: Q = P

Marginal Revenue(MR) is the increase in total income (gross revenue) with an increase in sales volume by one unit: MR= DTR: DQ.

The dynamics of average and marginal income of competitive and non-competitive firms are presented in Figures 3.3 and 3.4.

Because the price for a competitive company– this is a given (constant) value and does not depend on the volume of production, then average income and marginal income are equal to price and their curves look like one horizontal line: MR = AR = P (Figure 3.3).

Rice. 3.3. Average and marginal Fig. 3.4. Average and extreme

income of a competitive company income of a monopolist company

Non-competitive firm (for example, monopolist) can influence the price, for example, by reducing it to increase sales, so her average income curve is downward sloping and characterizes demand for a non-competitive firm's product(Fig. 3.4). As long as demand is price elastic, the firm can reduce prices and increase sales. However, when demand becomes price inelastic, a further decrease in price leads to a fall in total income.

Monopolist's marginal revenue (MR)) less than average income (price P), that is M.R.<Р . In order to sell an additional unit of output, a non-competitive firm is forced to reduce the price not only of the additional unit, but also of all previous units, covering, at the expense of the price of the additional unit of output, losses from the reduction in prices of previous units. Therefore, the marginal revenue (MR) curve of a non-competitive firm is always below the average revenue (AR) curve.