What is sold in a perfectly competitive market? General characteristics of a perfectly competitive market

In the 19th century, a small funeral home operated and flourished in Kansas City. But one not very happy day, its owner Almon Strowger calculated his income over the past months and found that turnover was falling, but his main competitor, on the contrary, had increased sales.

A small investigation showed that the fact was that the wealthiest clients had already begun to use telephones, and in the event of the death of a relative, they called the telephone exchange, where the wife of Strowger’s main competitor worked. When she was asked to connect with a funeral agency, of course, she redirected everyone to her own husband.

This is the story about unfair competition. And it could have ended in completely different ways. Having counted his losses, the entrepreneur could well have closed his own agency or killed the telephone operator in a fit of rage. But Almon Strowger acted differently: when complaints to the station management did not yield results, he focused on creating a mechanism that would replace manual labor. So in 1892, the first automatic telephone exchange was invented and patented, which the creator himself called “a telephone without young ladies and curses.”

Such is the diversity of competition! It can serve as an engine of progress, or, on the contrary, it can become the cause of brutal crimes. And in order to form your own opinion whether competition is beneficial to society or dangerous for it, you will have to understand in detail the nature of this phenomenon. Shall we get started?

Competition -what is this in simple words

The word “competition,” borrowed from the German “konkurrieren,” was first recorded in the Russian dictionary in 1878. The term originates from two Latin words:

• con – together;
• currere - to run.

Thus, competition is the rivalry of several subjects to achieve one goal. Moreover, the successes of one always mean losses for the other. Biologists consider competition to be the driving force of evolution: it is thanks to it that the fittest representatives of flora and fauna are preserved on the planet, and the weakest gradually die out.

Economists characterize competition as a struggle between companies. Each of them defends its own interests: it tries by any means to attract the attention of buyers, sell as many goods and services as possible and ultimately get maximum profit.

Interestingly, the word “competition” has the same roots as “competition”. But in this case we're talking about not about the constant struggle for the buyer, but about the desire to achieve victory in the competition.

Competition as an economic law

For the first time, humanity encountered the phenomenon of economic competition in ancient times, in conditions of simple commodity production. Already in primitive society, every artisan sought to extract maximum benefit for themselves to the detriment of other participants in market exchange.

With the emergence of the slave system, competition only intensified. Farms became larger, forced labor and employees allowed him to produce more and more, strengthening his position in society.

But it was only in the 18th century that Adam Smith, a Scottish economist and philosopher, became interested in competition as a phenomenon. He drew attention to the fact that a stable connection is emerging between rival companies. And he suggested that competition is not an accident, but an objective force that actively influences not only sellers and buyers, but also the development of the industry as a whole.

At the same time, 3 conditions necessary for the emergence of competition were formulated:

1. Complete economic independence of each manufacturer, in which each company acts solely to achieve its goals.
2. The dependence of each seller on the current market situation: the volume of supply and demand, size wages, exchange rate. So, if average salary sales consultant in Moscow is 40,000 rubles, the company can hardly count on finding, and most importantly, retaining an experienced, conscientious employee, offering him 25,000 rubles a month.
3. Lack of agreements with other manufacturers, that is, the struggle of all against all.

In such a situation, the only way for the manufacturer to remain a winner is to fight to improve the quality of the product, reduce its own costs, and subsequently prices. This is how the law of competition works - an objective process of removing expensive, low-quality products from the market. The essence of the law is revealed more fully through the functions that competition performs in the economy.

Functions of competition in economics

IN market economy competition has 6 main functions:

1 Regulating. In conditions of free competition, firms produce exactly as much product as the consumer needs. Equilibrium is not established immediately; the company arrives at it after several months of work, analyzing the volume of demand and sales.

For example: the manufacturer of school desks made of natural wood “KIND” sells 1500 – 1700 budget “Novichok” models during the summer season. If by June the company does not fulfill production plan In order to meet demand, she will have to introduce additional shifts, urgently expand the staff of workers, but still, not every buyer will agree to wait for their purchase instead of the standard 3 days 2-3 weeks. Some profits will be lost. The reverse situation is also a lose-lose: excess production entails the need to expand warehouse space, and with it the overall costs of the enterprise.

Thus, competition in the market determines the amount of demand for each firm's products and determines the optimal volume of production.

2 Allocative. Its name comes from the English “allocation” - “placement”. And it means that in a competitive environment it is easier to achieve success for enterprises that are located closest to production resources.

It is not for nothing that all hydroelectric power plants are located near large water sources, and the energy they produce supplies nearby regions. There is also no point in installing wind power plants in the Moscow region, which belongs to the areas of the 1st, most windless, category. But the Krasnodar Territory, according to the wind map of Russia, is assigned a coefficient of 6. And here the installation of wind power plants will be completely justified.

3 Innovative. Rapid development of technology in modern world- the result of competition. The easiest way to trace this process is through evolution. mobile phones. Only 36 years have passed since the release of the first model intended for free sale - Dyna TAC 8000X. On the scale of science, this is quite a bit. But today a smartphone is already a full-fledged replacement for a camera and game console, player and computer. And the engineers are not going to stop: leading manufacturers present new products every six months.

4 Adaptive. This function lies in the ability of enterprises to adapt to external environment, offering customers exactly what they expect. Thus, most grocery stores have either switched to 24-hour operating hours or close closer to midnight. This allows customers to buy groceries after work in peace, and allows entrepreneurs to increase profits.

5 Distribution. The market is a living organism that is constantly changing. Every day, entrepreneurs assess the situation and decide for themselves whether it makes sense to invest further own resources into existing projects or it’s time to explore new horizons. Thus, from low-income industries, where there is already a sufficient number of producers or the demand for products is steadily falling, there is a constant outflow to more promising directions.

6 Controlling. In conditions of fair competition, no manufacturer or seller can take a dominant position in the market and become a monopolist.

Working together, all the functions of competition transform the industry into an efficient, self-regulating system. And the totality competitive industries creates a more or less successful market economy. That is why competition is often called the engine of a market economy.

Advantages and disadvantages of competition in the market

For society as a whole, competition is a positive phenomenon. She:

• stimulates development scientific and technological progress, thereby improving the quality of life of the population;
• forces manufacturers to quickly respond to consumer requests: expand the range, improve the quality of goods, look for ways to reduce costs;
• forms fair market prices as opposed to extortionate pricing policy monopolists;
• prevents the development of shortages of goods and services.

And the main sign of the presence of free competition in most sectors of the state and an effective market economy in general is the increase in the middle class among the population.

There are also negative aspects in the competitive environment:

• a huge temptation for many manufacturers to use “dirty” methods to combat competitors;
• instability of the situation on the market for goods and services: out of 100 entrepreneurs, 95 burn out in the first couple of years of their activity;
• a large number of bankrupt commodity producers provokes an increase in unemployment;
• income is distributed unevenly between different social groups population.

Conditions for maintaining competition

Free competition is a very unstable market model. Left to their own devices, entrepreneurs first eliminate weak players from the game. They leave due to insufficient resources:

And then viable companies begin to negotiate among themselves: to maintain prices and even merge. Economically, this is more profitable for companies than constantly developing technologies and looking for ways to reduce costs. But the buyer ends up with inflated prices and an artificially created shortage.

2 economy class hairdressers have opened in a residential area. But the first was opened by a student without initial capital, and the second by experienced businessman with sufficient capital, who knows well that new business In the first months it requires constant infusions. Given the same prices, the chances of a hair salon owned by a student surviving are minimal.

But a businessman can attract visitors with a bright opening, greater comfort, for example, by immediately installing a TV. Later, he will send craftsmen to advanced training courses and offer new services, and maybe even lure the best workers from his competitor. In an effort to become a monopolist, he can work for a limited period of time even at a loss, which a student cannot afford. But after the competing hairdresser goes bankrupt, it will be possible to dictate their prices.

Thus, competition naturally always, sooner or later, leads to the emergence of a monopolist enterprise. And the only way to preserve the rivalry of entrepreneurs is government intervention.

Only external deterrents can protect firms from each other and prevent unfair competition. Therefore, all developed countries of the world have adopted antitrust legislation. And they actively use 2 main methods of protecting competition:

1. ban on the creation of monopolies;
2. strict regulation of prices for products of natural monopolies, for example, fixed tariffs for public transport tickets.

State regulation of competition

For Russia, the issue of supporting competition is of particular importance. For many decades, our country has been actively using the advantages of large-scale production, its specialization and concentration. In fact, the entire industry was in the hands of monopoly enterprises.

And with the transition to a market economy, it was necessary to create a new legal basis, which could support the nascent small and medium business. The first such document was the RSFSR Law “On Competition and Restrictions monopolistic activity on commodity markets”, adopted on March 22, 1991. In connection with the active development of the banking services market, on June 4, 1999, another legal act was approved - the Federal Law “On the Protection of Competition in the Market financial services».

In 2006, both regulations were replaced by the Federal Law “On the Protection of Competition”. Moreover, the implementation of antimonopoly policy is also prescribed in the Constitution of the Russian Federation. Article 34 states unequivocally: “It is not permitted economic activity aimed at monopolization and unfair competition.”

Monitoring the implementation of the provisions of the Law is carried out:

• Ministry of the Russian Federation for Antimonopoly Policy and Entrepreneurship Support;
• Its territorial divisions.

In order for the activities of an enterprise to be recognized as threatening free competition, the share of its products in the market for goods and services must be 65%. But there are exceptions: the antimonopoly committee can impose sanctions even with a share of 35%, if the company prevents new firms from entering the industry and dictates its terms to competitors.

Participants in competitive relations

Participants legal relations legislation calls subjects. In competition law, the main ones are:

• sellers or business entities, that is individual entrepreneurs and enterprises of all forms of ownership that carry out income-generating activities;
• buyers of goods or services. For them, the Law does not prescribe responsibilities, but acts precisely in their interests. If there is a suspicion of violations of antimonopoly legislation, buyers have the right to file a complaint with the territorial division of the antimonopoly committee.

The joint actions of buyers and sellers form supply and demand in the markets for goods and services. In conditions of free competition, they are balanced naturally and set economically fair prices.

Other entities can also influence competitive relations:

These entities do not participate in competition, but are within the scope of antimonopoly legislation, as they are capable of providing individual companies with significant advantages: issuing a license, financing, and establishing tax benefits. All this negatively affects other participants in the competition.

It is interesting that the circle of subjects of competition law includes not only already operating enterprises and real buyers, but also potential sellers and potential consumers:

• potential seller is one who is ready to begin producing and/or selling a product within 1 year that is already on the market at a price not exceeding the market average by more than 10%. At the same time, production costs will be recouped within 12 months;
• a potential buyer is someone who is ready to purchase a product, but for some reason has not yet done so.

Since, in an effort to oust competitors, firms often join forces, the Law defines another subject of competition law – a group of persons. They can be united by relationships of any kind: labor or contractual, property or related.

Although their actions are coordinated and aimed at achieving the same goal, in court proceedings the extent of each person's participation in the crime is considered individually.

Forms of competition

To remain within the limits of the law, today it is not enough not to cross the 65% barrier of control over the industry. On October 5, 2015, Chapter 2.1 was introduced into the Federal Law “On the Protection of Competition”. Unfair competition. And now the Antimonopoly Committee has the right to consider not only the degree of influence of the company, but also the methods of its struggle. Therefore, it is very important to understand the line where fair competition, approved by society, ceases to be such.

Fair competition – honest and legal methods of competition that do not conflict with generally accepted business norms:

Unfair competition – any actions of business entities that contradict the law and business ethics, and may cause harm business reputation competitors, causing them financial damage.

Methods of unfair competition:

Types of Competitive Markets

Depending on the degree of competition between firms, there are 4 main types of markets for goods and services:

1. Perfect competition, in which a huge number of firms operate in the industry, and there are no barriers for newcomers. A product in a perfectly competitive market is standardized. For example, in each region there are hundreds of farms, which provide stores with eggs, milk, vegetables and fruits. Farmers cannot influence the price of their products in any way, but any landowner is able to enter the market without much effort.
2. Monopolistic competition– a market in which there are also a large number of sellers, and there are no barriers to entry into the industry. But the product on such a market has its own peculiarity. For example, one publishing house publishes exclusively detective stories, another - women's novels, and a third - popular science literature. Competition here is non-price, and advertising and brand awareness help increase it.
3. Oligopoly- market represented a small amount sellers, largely due to the fact that entry into the industry is difficult. For example, to produce household appliances, one desire is not enough. Serious financial investments, engineering developments, highly qualified personnel, regulatory approvals, thoughtful marketing strategy. Of course, few entrepreneurs are capable of realizing all this. Those who succeed become the few major players who can already influence pricing.
4. Absolute monopoly. The market is represented by one single seller, and entry into the industry is blocked. The monopolist determines the volume of output and has unlimited power over prices. Example: OJSC Gazprom, OJSC Russian Railways.

Thus, the weaker the competition in the market for goods or services, the more power the producer has. And vice versa, when there are many sellers, the buyer has the opportunity to choose the product that suits him best in terms of price and quality.

Video: Competition and its types

Types of competition in economics

Economists combine all 4 market models into 2 large groups, highlighting:

1. perfect competition;
2. imperfect competition.

Perfect or pure competition– an ideal model, an abstraction that is very rarely found in real life. It is characterized by:

• A very large number of sellers in the industry. They act independently of each other, each working in their own interests. Thus, there are a huge number of fishing enterprises in the world. And the largest of them account for approximately 0.0000107% of the world's catch. Even if one or more firms increase their catch several times, this will not affect the state of the industry in any way.
• Standardized or homogeneous product. The product is similar or so similar that, by and large, it makes no difference to the buyer which seller makes the purchase. A striking example: currency exchangers.
• The seller's inability to influence the price of the product. For example, if at a vegetable market 3 sellers at once set a price of 300 rubles for 500-gram baskets of strawberries, it makes no sense for the fourth to demand 400 rubles. He simply won’t sell the berries, and they will spoil. But it is also unprofitable to reduce prices if there is an opportunity to earn more. Thus, in a perfectly competitive market, the seller always takes the role of a price follower.
• Free entry into and exit from the industry. New firms can enter a competitive market without having either serious financial capabilities or technological innovations. Legislative authorities do not interfere with them; on the contrary, all information about doing business is freely available. Example: stall trade, creation of construction and repair teams.

is a situation in which one or more conditions of perfect competition are not met:

• Although products from different sellers belong to the same group, they have their own characteristics. For example, one sells Golden apples, and the other sells Semerenko;
• There are barriers to entry into the industry: for example, to open the most modest gym you will need at least 1 million rubles. And this is not an amount that any potential entrepreneur can easily find;
• There are already leading enterprises in the industry. In this case, we are talking more about oligopolistic competition;
• An entrepreneur has the opportunity to influence the price of his products from the very beginning. For example, the same strawberry sellers in a small market may well agree on a single price. Or, using greenhouses, the farmer will achieve ripening of the berries 2 weeks earlier, and will be able to sell his harvest at a much higher price.

Thus, imperfect competition is a market model that, to varying degrees, allows sellers to influence the price of their products. And monopolistic competition, oligopoly, monopoly are just varieties of imperfect competition.

Types of competition by degree of freedom

The phrase “free competition” has long been stable. It implies that the activities of individual entrepreneurs are not influenced by any government bodies, nor larger and more influential market players.

In contrast to free competition, there is also regulated competition. It occurs when one or more firms achieve significant market share and are able to influence prices and discourage newcomers from entering the industry. The regulatory function in this case is performed by the state.

Types of competition by industry

Economics deals with market competition - the struggle of producers for each buyer. Demand in this market is limited by the solvency of consumers, and the struggle is waged by everyone by legal means: price and non-price.

Market competition is:

• intra-industry:
• intersectoral;
• interethnic.

Intra-industry competition- This is rivalry between manufacturers or sellers operating in the same industry. They produce or sell similar products that differ in price, model range, quality. Moreover, intra-industry competition can be:

• subject;
• species.

Subject competition– one in which rival firms produce identical products. It may vary only slightly in quality. Example: Russian manufacturers bed linen of the middle price category - “SiliD”, “MONA LIZA”, “AMORE MIO”.

Species competition- a type of rivalry in which companies produce the same type of product: shoes, clothing, furniture, but at the same time it differs in some serious parameters. For example, the RIMAL shoe factory produces affordable children's shoes for absolutely healthy children, and the MEGA Orthopedic company specializes in sewing orthopedic models.

Interindustry or functional competition is the struggle between representatives of different industries. For example, residents of Moscow can get to Sochi as by rail, and by plane. The first is cheaper, the second saves time. But in general, both types of transport help the traveler achieve his goal.

Interethnic competition is a competition between two countries. Its goal may be not only to conquer the largest possible sales market, but also prestige on the world stage. Example: the confrontation between the USA and the USSR in the field of space exploration.

Competition methods

There are two ways to try to beat your competitors: by lowering the price or by offering more attractive conditions, but at the same prices.

The first strategy is price competition. For example, a newly opened dry cleaner offers a 20 percent discount on its services. The business owner understands perfectly well that in the future he will not be able to maintain such a low price, but in short term the strategy will ensure a large influx of customers, and if they like the service, they will probably come back again and again.

Good service- this is already non-price competition, which is valued higher by most buyers than more low price and possible discounts. Our subconscious perceives a price reduction more aggressively, forcing us to meticulously look for a catch. Methods of non-price competition (memorable advertising, convenient delivery conditions, beautiful packaging, other marketing ploys) seem more noble, although if you dig deeper, there is no difference.

For example, with the same prices for bottled water, the Aqua company will also offer free shipping. In terms of conversion, the price per liter of water for the buyer will be lower. And non-price competition will turn out to be the same as price competition.

Price competition is not always a short-term phenomenon. Thus, with timely updating of equipment, improvement of the system and logistics, the manufacturer can really achieve a significant reduction in costs.

While maintaining the size of the trade margin and the achieved sales volume, the company's profit does not decrease, although for the end consumer the product will become significantly cheaper. In such a situation, competitors can either follow more successful company, or leave the market.

Competition beyond economics

Competition as a competition for a good that is available in limited quantities is characteristic of politics and science, sports and military affairs, art and creativity. There is probably not one human activity, in which it would be impossible for a struggle to arise for money, power, fame or respect.

Achieving a goal occurs through competitive actions, a concept formulated American economist Michael Porter. It involves the commission of actions directly or indirectly addressed to competitors. Their goal: to strengthen their position and at the same time weaken their opponent.

Competition in biology

If in human society competition is rivalry, in the world of flora and fauna the synonymous phenomenon is more likely to be war. A war for a place to live, food sources, a war for life itself.

Competition in biology is of 2 types:

1. Intraspecific competition. The most desperate and brutal struggle flares up between representatives of the same species. Birds fight to the death for best places for nesting, walruses and seals win a female in battle for mating, and out of hundreds of young fir trees in a clearing, only 2-3 trees grow to adulthood. The rest die from lack of sunlight.
2. Interspecific competition flares up between individuals different types. Moreover, the Russian biologist G.F. Gause proved that if 2 species with the same needs live in the same territory, the stronger one will definitely displace the weakest. Thus, in Australia, the native stingless bee has already been almost completely destroyed. And all because the honey bee was brought to the mainland several decades ago.

Competition of norms in law

In legal practice, situations often occur when the same action is regulated by two different regulations. And the court will have to decide which of the two documents to apply. Competition between norms occurs:

• temporary, when the rules were in force during different periods of time;
• spatial: for example, in different states of America, different punishments are provided for the same crime;
• hierarchical: all regulations have different legal force. The main legal act in our country is the Constitution of the Russian Federation, then come the Federal Constitutional Laws, after them Federal laws and so on.

But the most common competition of norms in law is substantive. The easiest way to explain it is with an example. Let's say a crime is committed with two aggravating circumstances. They are described in different articles of the Criminal Code. When determining the punishment, the judge, as a rule, classifies the crime according to the norm that provides for a more severe punishment. And, conversely, in two mitigating circumstances, a rule prescribing a more lenient punishment is applied.

Answers on questions

Competitively capable as spelled

The correct spelling is “competitive” (without the “n”). This word consists of two roots: “competition” - the “n” and “capable” are missing here.

What is a competitor

A competitor is a person or group of people, or it can be a company or even a government, that competes with another person(s) for ownership or interests.

Conclusion

Competition is the driving force of evolution. It condemns the weak to extinction and allows the strongest to survive. It is thanks to it that increasingly resistant strains of bacteria and viruses appear on the planet that are resistant to known antibiotics and antiviral drugs. Hundreds of animal species and thousands of plant species have become extinct due to competition. But those that survived managed to adapt to droughts and frosts, polluted air and the omnipresence of humanity.

In the economy, competition acts for the benefit of the consumer, forcing sellers to reduce prices and expand their range, manufacturers to improve the quality of goods and design new, even more perfect models.

Entrepreneurs are afraid of competition and do not like it. Still would! It is impossible to relax even for one day, otherwise a more efficient comrade will grab a share of the profit. And yet, fair competition is the fairest fight, which unmistakably identifies the losers and those who chose the right strategy.

Roman Kozhin

Author of the blog "My Ruble", former head of the credit department at a bank. Currently an Internet entrepreneur and investor. I talk about how to effectively manage your money, increase it profitably, and earn more. Thanks to the Internet, I moved to the sea. You can follow my life on social networks using the links below.

Today we will look at one example of perfect competition and find out why there cannot be pure perfect competition?

In fact, it is difficult to give examples of perfect competition. Let's take the summer sale of agricultural products. The manufacturer cannot increase the price of the product, as this will greatly affect product sales. Therefore, they set the price closer to the market price (the same as everyone else), and some even lower prices (probably by cutting costs) to increase the number of sales. Still, such an example cannot be given to purely perfect competition. Although producers sell the same goods (carrots, cucumbers, tomatoes, etc.), they are not on equal terms. Some producers are huge agricultural complexes, others are ordinary private owners, grandparents, for example. Therefore, usually one or several large firms supply a lot of products to stores, thereby completely controlling it, and other small farms that do not pose much competition to large firms.

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This already reminds me of an oligopoly. Therefore, it is impossible to give examples of pure perfect competition, since it simply does not exist. Other examples partly remind us of perfect competition, but are not completely perfect.

Updated: 2017-04-02

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IN economic theory, as in physics, there are different kinds of abstractions. Abstraction is something that does not exist in nature in its “pure form.” But the introduction and study of abstract concepts helps to study real objects, processes and phenomena close to them. So, from the school physics course we know about the “material point” and the “absolutely solid body”.

An example of an abstract concept in economics is pure or perfect (absolute) competition.

What is pure competition

Perfect competition is a model of economic functioning in which neither sellers nor buyers influence the price, but only contribute to its formation through the mechanisms of supply and demand. In other words, both parties, the seller and the buyer, adapt to the equilibrium state of the market.

With perfect competition, there are many buyers and sellers in the market and there is no monopoly at all.

Firms enter and exit the market completely freely, and information about the price of a product is available to any market participant. Sellers and buyers depend on how the market will develop. In order to maximize profits, sellers have to improve and use the achievements of scientific and technological progress not only in the process of direct production of products, but also when selling them.

The use of advanced technologies will inevitably lead to a reduction in costs, and therefore increase the profit of the enterprise.

We list the main properties:

• homogeneity, divisibility of products. The product of one seller may well be replaced by the products of another;
• a huge number of sellers - the entire market demand is covered not by a few firms (oligopoly) or one (monopoly), but by hundreds and even thousands of similar enterprises;
• high degree of mobility production factors. Neither manufacturers, nor sellers, much less the state, influence price formation. The cost of goods depends solely on three factors: production costs, supply and demand;
• absence of barriers to entry into the market or, conversely, to exit it. This feature should be understood as follows: to begin with entrepreneurial activity businesses do not require licenses or permits. Such enterprises are, for example, shoe repair shops, tailor shops, etc.;
• all market participants have equal access to information about the price of goods.

Pure competition is characterized by the presence of all of the above characteristics.

Otherwise, competition is called imperfect. One example of imperfect competition is giving bribes officials for preferences and lobbying interests.

In conditions of absolute competition, one global trend is observed - a decrease in the profit of each seller. Perfect competition in its pure form does not exist anywhere. If pure competition were introduced into practice, it would quickly lead to market decline. Thus, enterprises operating in the market will sooner or later modernize their production base.

But, despite this, the price will continue to decline - competitors will “take bread” from each other, conquering a larger market. In such conditions, income will quickly give way to losses and the situation can only be saved with the help of external intervention (for example, government regulation).

Examples

Despite the fact that in its “pure form” market competition is not found anywhere, this market model can be used to describe the functioning of small firms - car repair shops, photo studios, construction crews, stalls, etc. All these enterprises are united by approximately the same cost of production, the scale of activity is negligible compared to the size of the entire market, a huge number of competitors, the forced need to accept the “rules of the game” formed by the participants in this industry.

The opposite of perfect competition is monopoly.

For example, the absolute monopolist of the Russian gas sector is Gazprom. Monopolies have a negative impact on the market, since such firms do not need to invest money in their development. Anyway, no one has other similar products - they will buy the products under any conditions.

Usually the real market operates in some intermediate form - there are several large players, the rest of the share is distributed among small enterprises.

The perfectly competitive market model is based on four main conditions (Figure 1.1). Let's consider them sequentially.

Rice. 1.1. Conditions of perfect competition

1.Product homogeneity. This means that the products of firms in the minds of buyers are homogeneous and indistinguishable, i.e. These products from different enterprises are completely interchangeable (they are complete substitute goods). More strictly, the concept of product homogeneity can be expressed through the value of the cross price elasticity of demand for these goods. For any pair of manufacturing enterprises it should be close to infinity. The economic meaning of this provision is as follows: the goods are so similar to each other that even a small increase in price by one manufacturer leads to a complete switch in demand for the products of other enterprises.

Under these conditions, no buyer will be willing to pay a price higher to any particular company than he would pay in a competitive bid. After all, the goods are the same, buyers do not care which company they buy them from, and they, of course, opt for cheaper ones. The condition of homogeneity of products actually means that the difference in prices is the only reason why a buyer can choose one seller over another.

2. With perfect competition, neither sellers nor buyers influence the market situation due to small size of the company and large number of market participants. Sometimes both of these features of perfect competition are combined when talking about the atomistic structure of the market. This means that there are a large number of small sellers and buyers in the market, just as any drop of water consists of a gigantic number of tiny atoms.

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, but the decision to reduce or increase their volumes does not create either a surplus or a shortage of goods. The total size of supply and demand simply “does not notice” such small changes.

All of the above-mentioned restrictions (homogeneity of products, large number and small size of enterprises) actually predetermine that with perfect competition, market entities are not able to influence prices. Therefore, it is often said that under perfect competition, each individual selling firm “gets the price,” or is a price-taker.

3. An important condition for perfect competition is absence of barriers to entry and exit from the market. When such barriers exist, sellers (or buyers) begin to behave like a single corporation, even if there are many of them and they are all small firms.

On the contrary, the absence of barriers or freedom to enter and leave the market (industry) typical of perfect competition means that resources are completely mobile and move without problems from one type of activity to another. There are no difficulties with the cessation of operations on the market. Conditions do not force anyone to remain in the industry if it is not in their best interests. In other words, the absence of barriers means absolute flexibility and adaptability of a perfectly competitive market.

4. Information about prices, technology and likely profits is freely available to everyone. Firms have the ability to quickly and efficiently respond to changing market conditions by moving the resources they use. There are no trade secrets, unpredictable developments, or unexpected actions of competitors. Decisions are made by the company in conditions of complete certainty regarding the market situation or, what is the same, in the presence perfect information about the market.

In reality, perfect competition is quite rare and only a few markets come close to it (for example, the grain market, valuable papers, foreign currencies). For us, not only the area of ​​practical application of our knowledge (in these markets) is of significant importance, but also the fact that perfect competition is the simplest situation and provides an initial, reference sample for comparing and assessing the effectiveness of real economic processes.

What should the demand curve for the product of a perfectly competitive firm look like? Let us take into account, firstly, that the company accepts the market price, which serves as a given value for the corresponding calculations. Secondly, the company enters the market with a very small part of the total quantity of goods produced and sold by the industry. Consequently, the volume of its production will not affect the market situation in any way and this given price level will not change with an increase or decrease in the output of this firm.

Obviously, in such conditions, the demand for the company’s products will graphically look like a horizontal line (Fig. 1.2). Whether the firm produces 10 units, 20 or 1, the market will absorb them at the same price R.

From an economic point of view, a price line parallel to the x-axis means absolute elasticity of demand. In the case of an infinitesimal reduction in price, the firm could expand its sales indefinitely. With an infinitesimal increase in price, the company's sales would be reduced to zero.

Rice. 1.2. Demand and total revenue curves for an individual firm under conditions

perfect competition

The presence of absolutely elastic demand for a firm's products is considered to be a 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. Indeed, fulfilling the criterion of perfect competition sets many conditions for the company to operate in the market, in particular, it determines the patterns of income generation.

In an industry, a competitive firm can occupy different positions. It depends on what its costs are in relation to the market price of the product that this company produces. In economic theory, the three most general cases of the relationship between the average costs of a company are considered AC and market price R, determining the state of the company (receiving excess profits, normal profits or the presence of losses), which is presented in Fig. 1.3.

In the first case (Fig. 1.3, a) we observe an unsuccessful, inefficient company: its costs are too high compared to the price of the product on the market, and they do not pay off. Such a firm should either modernize production and reduce costs, or leave the industry.

In case 1.3, b the company with production volume Q E achieves equality between average cost and price (AC = P), This is what characterizes the equilibrium of a firm in an industry. After all, the average cost function of a firm can be considered as a function of supply, and demand is a function of price R. So equality is achieved between supply and demand, i.e. equilibrium. Volume of production Q E in this case is equilibrium. Being in a state of equilibrium, the firm earns only accounting profit, and economic profit (i.e., excess profit) is zero. The presence of accounting profit provides the company with a favorable position in the industry.

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

The position of a company receiving excess profits in the industry is shown in Fig. 1.3, c. With production volume in the range from Q 1 before Q 2 The firm has excess profit: the income received from selling products at a price R, exceeds the firm's costs (AC< Р). It should be noted that the maximum profit is achieved when producing products in the amount of Q 2 The profit margin is shown in Fig. 1.3, in the shaded area.

However, it is possible to more accurately determine the moment when it is necessary to stop increasing production so that profits do not turn into losses, as, for example, when the output volume is at the level Q3. To do this, it is necessary to compare the marginal costs of the company MS with the market price, which for competitive firm is also the marginal revenue MR. Let us remember that the income (revenue) of a company is the payments received in its favor when selling products. Like many other indicators, economic science calculates income in three varieties. Total Revenue (TR) name the total amount of revenue that the company receives. Average Income (AR) reflects revenue per unit products sold, or, which is the same thing, total income divided by the number of products sold. Finally, marginal revenue (MR) represents additional income received as a result of the sale of the last unit of production sold.

A direct consequence of fulfilling the criterion of perfect competition is that the average income for any volume of output is equal to the same value, namely, the price of the product. The marginal revenue is always at the same level. So, if the established market price for a loaf of bread is 23 rubles, then the bread stall acting as a perfect competitor accepts it regardless of sales volume (the criterion of perfect competition is met). Both 100 and 1000 loaves will be sold at the same price per piece. Under these conditions, each additional loaf sold will bring the stall 23 rubles. (marginal revenue). And the same amount of revenue will be generated on average for each loaf of bread sold (average income). Thus, equality is established between average income, marginal income and price (AR=MR=P). Therefore, the demand curve for the products of an individual enterprise under conditions of perfect competition is at the same time the curve of its average and marginal price.

As for the total income (total revenue) of the enterprise, it changes in proportion to the change in output and in the same direction. That is, there is a direct, linear relationship:

If the stall in our example sold 100 loaves of bread for 23 rubles, then its revenue, naturally, will be 2,300 rubles.

Rice. 1.3. Position of a competitive firm in the industry:

a - the company suffers losses;

b - receiving normal profit;

c - receiving excess profits

Graphically, the total (gross) income curve is a ray drawn through the origin with a slope:

tg=∆TR/∆Q=MR=P

That is, the slope of the gross revenue curve is equal to marginal revenue, which in turn is equal to the market price of the product sold by the competitive firm. From here, in particular, it follows that the higher the price, the steeper the gross income straight line will go up.

Marginal costs reflect individual production cost each subsequent unit of goods and change faster than average costs. Therefore, the firm achieves equality MC = MR, at which profit is maximum, much earlier than average costs equal the price of the product. U the condition of equality of marginal costs 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 company, regardless of its position in the industry (whether it suffers losses, receives normal profits or excess profits), must produce only optimal volume of production. This means that the entrepreneur must strive for a volume of output at which the cost of producing the last unit of goods MS will coincide with the amount of income from the sale of this last unit MR. In other words, optimal output is achieved when marginal cost equals the firm's marginal revenue: MS = MR. Let's consider this situation in Fig. 1.4, a.

Rice. 1.4. Analysis of the position of a competitive company in the industry:

a - finding the optimal output volume;

b - determination of profit (or loss) of a company - a perfect competitor

In Figure 1.4, a we see that for this company equality MS=MR achieved upon production and sale of the 10th unit of output. Therefore, 10 units of goods are the optimal production volume, since this volume of output allows maximizing profit, i.e. receive all profits in full. By producing less, say five units, the firm's profit would be incomplete and we would receive only part of the shaded figure representing profit.

It is necessary to distinguish between the profit received from the production and sale of one unit of production (for example, the fourth or fifth), and the total, total profit. When we talk about profit maximization, we are talking about getting the entire profit, i.e. total profit. Therefore, despite the fact that the maximum positive difference between MR And MS gives the production of only the fifth unit of production (see Fig. 1.4, a), we will not stop at this quantity and will continue production. We are completely interested in all products, in the production of which MS< МR, which brings profit right up to before MC leveling And MR. After all, the market price pays for the production costs of the seventh and even the ninth unit of production, additionally bringing, albeit small, but still profit. So why give it up? We should refuse losses, which in our example arise during the production of the 11th unit of production. Now the balance between marginal revenue and marginal cost changes in the opposite direction: MC > MR. That is why, in order to receive the entire profit in full (to maximize profit), you should stop precisely at the 10th unit of production, at which MS=MR. In this case, the possibilities for further increasing profits have been exhausted, as evidenced by this equality.

The rule we considered for the equality of marginal costs to marginal revenue underlies the principle of production optimization, with the help of which it is determined optimal, the most profitable volume of production at any price, emerging on the market.

Now we have to find out what it's like position of the firm in the industry at optimal output volume: whether the firm will incur losses or make profits. To do this, let's turn to Fig. 1.4, b, where the company is depicted in full: to the function MS added average cost function graph AC.

Let us pay attention to what indicators are plotted on the coordinate axes. Not only the market price is plotted on the ordinate axis (vertically) R, equal to marginal revenue under perfect competition, but also all types of costs (AC And MS) V in monetary terms. The abscissa axis (horizontal) always shows only the output volume Q. To determine the amount of profit (or loss), we must perform several steps.

Step one: Using the optimization rule, we determine the optimal output volume Q opt, in the production of the last unit of which equality is achieved MS = MR. On the graph this is marked by the intersection point of the functions MS And MR. From this point we lower the perpendicular (dashed line) down to the x-axis, where we find the desired optimal output volume. For the company in Figure 1.4, b, equality between MS And MR achieved upon production of the 10th unit of output. Therefore, the optimal output volume is 10 units.

Recall that in perfect competition, the firm's marginal revenue coincides with the 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 saves us from searching for the price of optimal output: it will always be equal to the marginal revenue from the last unit of goods.

Step two: let's determine the average cost AC when producing goods in the volume Q opt. To do this, from the point Q opt equal to 10 units, draw a perpendicular upward until it intersects with the function AC, placing a point on this curve. From the resulting point we draw a perpendicular to the left to the ordinate axis, on which the value of costs is plotted in in cash. Now we know what the average cost is AC optimal production volume.

Step three: determine the amount of profit (or loss) of the company. We have already found out what the average cost is AC for Q opt. Now all that remains is to compare them with the market price R, prevailing in the industry.

Remaining on the ordinate axis, we see that the level marked on it AC< Р. Therefore, the firm makes a profit. To determine the size of the entire profit, multiply the difference between price and average costs (R-AS), component of the profit from one unit of production, for the entire volume of the entire output Q opt:

Firm profit = (R - AC)* Q opt

Of course, we are talking about profit, provided that P > AC. If it turned out that R< АС, then we would be talking about the company’s losses, the amount of which is calculated using the same formula.

In Figure 1.4, b, profit is shown by a shaded rectangle. Please note that in this case the company received not an accounting, but an economic or excess profit, exceeding the costs of lost opportunities.

There is also another way to determine profit(or loss) of the company. Let us remember what can be calculated if we know the sales volume of the company Q opt and the market price R? Of course, the size total income:

TR = P* Q opt

Knowing the magnitude AC and output volume, we can calculate the value total costs:

TS = AC* Q opt

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

Profit (or loss) of the company = TR - TS.

When (TR - TS) > 0 the firm makes a profit, but if (TR - TS)< 0 , the company suffers losses.

So, at the optimal output volume, when MC = MR, a competitive firm can make an economic profit (excess profit) or incur losses. Why is it necessary to determine the optimal output volume in case of losses? The point is that if a company produces according to the rule MC = MR, then at any (profitable or unprofitable) price that develops in the industry, it still wins.

Optimization benefits is that if equilibrium price in the industry is higher than the average costs of a perfect competitor, then the firm maximizes profit. If the equilibrium price in the market falls below average costs, then MC = MR firm minimizes losses, otherwise they could be much larger.

What is happening to the company in the industry? in the long term? If the equilibrium price established in the industry market is higher than average costs, then firms receive excess profits, which stimulates the emergence of new firms in the profitable industry. The influx of new firms expands the industry's offer. We remember that an increase in the supply of goods on the market leads to a decrease in price. Falling prices “eat up” the excess profits of firms.

Continuing to decline, the market price gradually falls below the average costs of firms in the industry. Losses appear, which “expels” unprofitable firms from the industry. Note: those firms that are unable to implement cost-cutting measures leave the industry, those. ineffective companies. Thus, excess supply in the industry is reduced, while the price on the market begins to rise again, and the profits of companies capable of restructuring production increase.

Thus, in the long term industry supply changes. This occurs 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 they are equal to average costs: P = AC. In this situation, firms do not incur losses, but also do not receive excess profits. Such long term situation called equilibrium.

In conditions of equilibrium, when the demand price coincides with average costs, the firm produces products according to the optimization rule at the level MR = MS, those. produces the optimal volume of goods. In the long run, equilibrium is characterized by the fact that all the parameters of the firm coincide: AC = P = MR = MS. Since a perfect competitor always P=MR, That equilibrium condition for a competitive firm the industry is about equality AC = P = MS.

The position of a perfect competitor when equilibrium in the industry is achieved is shown in Fig. 1.5.

Rice. 1.5. Equilibrium of a perfect competitor firm

In Figure 1.5, the price function (market demand) for the company’s products passes through the intersection point of the functions AC And MS. Since under perfect competition the firm's marginal revenue function is MR coincides with the demand (or price) function, then the optimal production volume Q opt corresponds to the equality AC = P = MR = MS, which characterizes the position of the company in the conditions equilibrium(at point E). We see that in conditions long-term equilibrium The firm receives neither economic profit nor loss.

However, what happens to the company itself? in the long run? Long term LR(from the English Long-run period) fixed costs of the company FC increase with the expansion of its production potential. In this case, changing the scale of the company using appropriate technologies gives the effect of economies of scale. The essence of this economies of scale is that in the long run the average cost LRAC having decreased after the introduction of resource-saving technologies, they cease to change and, as output increases, remain at a minimum level. Once economies of scale are exhausted, average costs begin to rise again.

The behavior of average costs in the long term is shown in Fig. 1.6, where economies of scale are observed when production increases from Qa to Qb. Over the long term, the firm changes its scale in search of the best output and lowest costs. In accordance with the change in the size of the company (volume production capacity) its short-term costs change AC. Various options for the scale of the company, shown in Fig. 1.6 in the form of short-term AC, give an idea of ​​how a firm's output may change in the long run L.R. The sum of their minimum values ​​is the long-term average costs of the company - LRAC.

Rice. 1.6. Long run average cost of a firm - LRAC

What is the best size for a company? Obviously one at which short-run average costs reach the minimum level of long-run average costs LRAC. Indeed, as a result of long-term changes in the industry, the market price is set at the minimum LRAC level. This is how the firm achieves long-run equilibrium. In conditions long-term equilibrium the minimum levels of the firm's short-term and long-term average costs 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. 1.7.

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. There is no non-price competition.

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. 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, no significant initial investment is required, positive effect the scale of production is extremely small and does not prevent new firms from entering the industry; there is no government intervention in the mechanism of supply and demand (subsidies, tax breaks, quotas, social programs and so on.). 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 perfect competition, the prevailing market price is determined by 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 the homogeneity of products and the presence of a large number of perfect substitutes, no firm can sell its goods at a price even slightly higher than the equilibrium price, Pe. 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 () - the total amount of 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 income () - 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 existing this moment time of market and technological conditions, 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 increases, and additional production can increase the total profit.
• 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 Function total costs 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 the 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 points), then the volume of supply of the firm equal to 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=(TC)`=(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. Let us determine the volume at which the average variable costs 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 new firms will not be able to influence resource prices and raise costs. operating companies. As a result, the LATC curve of a typical firm will remain the same.

Restoring equilibrium is achieved according to the following scheme: 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.

More high price allows firms to earn economic profits, 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, resulting 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.