Examples of perfect and imperfect competition. Perfect Competition

It is characterized by a balance of supply and demand. Thanks to this, the market is regulated independently and the seller or buyer cannot influence most of the processes, in particular pricing.

With this model, competition between sellers reaches its peak. Due to the fact that market participants practically do not influence the conditions of sales, the economy is resistant to the occurrence of negative processes, such as unemployment, inflation.

For perfect competition the following features are present:

• a large number of buyers and sellers, including representatives of small and medium-sized businesses;
• sellers and manufacturers offer homogeneous goods;
• easy entry to the market even for small companies, the absence of barriers from the state;
• high awareness of all market participants about the state of affairs on it, processes, subjects, etc., information can be obtained by everyone without problems and restrictions;
• sellers and buyers cannot influence the terms of trade, they take them for granted;
• high mobility of resources.

If a model does not have at least one of these characteristics, it is not perfect competition. Any market strives for this structure. The main task of the state in this process is the creation of appropriate conditions through the formation of a regulatory framework.

Benefits of Perfect Competition

The desire for perfect competition makes it possible to achieve high efficiency of a market economy. Despite the fact that many people call such a model ideal, it has both undeniable advantages and some disadvantages.

Benefits of perfect competition:

• self-regulation of the market;
• no commodity shortage;
• efficient allocation of resources;
• high production efficiency;
• no overpricing;
• equality of opportunity for market participants;
• freedom to develop entrepreneurship;
• the state does not interfere in market processes;
• both buyers and sellers benefit here.

Disadvantages of perfect competition

Despite the large number of advantages, pure competition has certain disadvantages:

• the market system is unstable;
• the risk of overproduction;
• market participants get different results;
• each market participant is focused on personal interests, ignoring public ones.

Almost all the shortcomings of this market model boil down to the fact that with equal opportunities, equal results are not achieved. This is explained by the fact that each market participant organizes production, a marketing company in its own way, allocates resources, uses innovative technologies. Therefore, success is achieved by those who competently approach the organization of the production and sales process, and also use advanced technologies to outperform competitors.

To achieve economic efficiency, first of all, it is necessary to achieve efficiency in the production and distribution of resources. This is easy to achieve in conditions of perfect competition. Therefore, it is considered an ideal market model. But in reality, its practical implementation does not exist. Minimal costs, efficient allocation of resources, lack of shortages, self-regulation of processes - all these conditions cannot be met in the long term. Although the desire to achieve a system that is as close as possible to pure competition allows the economy to develop.

• 7.1. Features of a perfectly competitive market.
• 7.2. The performance of a competitive firm in the short run.
• 7.3. Perfect competition market in long term.

Test questions.

In topic 7, pay attention to the connection with the theory of the following topical issues Russian economy:

• Why is there no free pricing in crime-controlled markets?
• Where can you find perfect competition in Russia?
• Bankruptcy of enterprises in Russia.
• What do they do Russian enterprises to reach the break-even zone?
• Why temporarily stop production at Russian factories?
• Does widespread small business lead to price changes?
• Why even in markets with a high degree competition may require government intervention.

Features of a perfectly competitive market

Supply and demand - two factors that give life to the market as a meeting place, form the level of prices for goods and services in the economy. Determining the cost and income curves, they create the external environment for the existence of the firm. The behavior of the firm itself, its choice of production volumes, and hence the size of the demand for resources and the size of the supply of its own goods, depend on the type of market in which it operates.

competition

The most powerful factor dictating general terms and Conditions the functioning of a particular market is the degree of development of competitive relations on it.

Etymologically word competition goes back to latin concurrentia, meaning clash, competition. Market competition is the struggle for the limited demand of the consumer, conducted between firms in the parts (segments) of the market accessible to them. As already noted (see 2.2.2), competition performs in a market economy the most important function of a counterbalance and, at the same time, an addition to the individualism of market entities. It forces them to take into account the interests of the consumer, and hence the interests of society as a whole.

Indeed, in the course of competition, the market selects from a variety of goods only those that consumers need. They are the ones that sell. Others remain unclaimed, and their production stops. In other words, outside a competitive environment, an individual satisfies his own interests, regardless of others. In the conditions of competition, the only way to realize one's own interest is to take into account the interests of other persons. Competition is a specific mechanism by which market economy solves fundamental questions what? as? for whom to produce 2

The development of competitive relations is closely related to splitting economic power. When it is absent, the consumer is deprived of a choice and is forced either to fully agree to the conditions dictated by the manufacturer, or to be completely left without the good he needs. On the contrary, when economic power is split and the consumer deals with many suppliers of similar goods, he can choose the one that best suits his needs and financial possibilities.

Competition and types of markets

According to the degree of development of competition economic theory identifies the following main market types:

• 1. Market of perfect competition,
• 2. Market of imperfect competition, in turn subdivided into:
  • a) monopolistic competition
  • b) oligopoly;
  • c) a monopoly.

In a market of perfect competition, the splitting of economic power is maximal and the mechanisms of competition operate in full force. Many manufacturers operate here, deprived of any leverage to impose their will on consumers.

At imperfect competition the splitting of economic power is weakened or non-existent. Therefore, the manufacturer acquires a certain degree of influence on the market.

The degree of market imperfection depends on the type of imperfect competition. In conditions monopolistic competition it is small and is associated only with the ability of the manufacturer to produce special varieties of goods that differ from competitive ones. Under an oligopoly, market imperfection is significant and is dictated by the small number of firms operating on it. Finally, monopoly means that only one manufacturer dominates the market.

7.1.1. Conditions for perfect competition

The perfect competition market model is based on four basic conditions (Figure 7.1).

Let's consider them sequentially.

Rice. 7.1.

In order for competition to be perfect, the goods offered by firms must meet the condition of product homogeneity. This means that the products of firms in the view of buyers are homogeneous and indistinguishable, i.e. products of different enterprises are completely interchangeable (they are complete substitute goods).

Uniformity

products

Under these conditions, no buyer would be willing to pay a hypothetical firm more than he would pay its competitors. After all, the goods are the same, customers do not care which company they buy from, and they, of course, opt for the cheapest. That is, the condition of product homogeneity actually means that the difference in prices is the only reason why the buyer can prefer one seller to another.

Small size and large number of market participants

Under perfect competition, neither sellers nor buyers influence the market situation due to the smallness and multiplicity of all market participants. Sometimes both of these sides of perfect competition are combined, speaking of the atomistic structure of the market. This means that there are a large number of small sellers and buyers operating in the market, just as any drop of water is made up of a gigantic number of tiny atoms.

At the same time, 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 lower or increase their volumes creates neither surpluses nor deficits. The aggregate size of supply and demand simply "does not notice" such small changes. So, if one of the countless beer stalls in Moscow closes, the capital's beer market will not become one iota more scarce, just as there will not be a surplus of the drink beloved by the people if one more “point” appears in addition to the existing ones.

The inability to dictate the price to the market

These limitations (homogeneity of products, large number and small size of enterprises) actually predetermine that under perfect competition, market participants are not able to influence prices.

It is ridiculous to believe, say, that one seller of potatoes on the "collective-farm" market will be able to impose on buyers a higher price for his product, if other conditions of perfect competition are observed. Namely, if there are many sellers and their potatoes are exactly the same. Therefore, it is often said that under perfect competition, each individual firm-seller "takes the price", or is a price-taker.

Market entities under conditions of perfect competition can influence the general situation only when they act in agreement. That is, when some external conditions encourage all sellers (or all buyers) of an industry to make the same decisions. In 1998, Russians experienced this for themselves, when in the first days after the devaluation of the ruble, all grocery stores, without agreeing, but equally understanding the situation, unanimously began to raise prices for goods of a “crisis” assortment - sugar, salt, flour, etc. Although the increase in prices was not economically justified (these goods rose in price much more than the ruble depreciated), the sellers managed to impose their will on the market precisely as a result of the unity of their position.

And this is not a special case. The difference in the consequences of a change in supply (or demand) by one firm and the entire industry as a whole plays a large role in the functioning of the perfectly competitive market.

No Barriers

The next condition of the perfect militia conbotniks (the goal is to force the criminal "owners" of the market to show themselves, and then arrest them), then it fights precisely for the removal of barriers to entering the market.

On the contrary, typical for perfect competition no barriers or freedom to enter to the market (industry) and leave it means that resources are completely mobile and move from one activity to another without problems. Buyers freely change their preferences when choosing goods, and sellers easily switch production to more profitable products.

There are no difficulties with the termination of operations in the market. Conditions do not force anyone to stay in the industry if it does not suit their interests. In other words, the absence of barriers means the absolute flexibility and adaptability of a perfectly competitive market.

Perfect

information

The last condition for the existence of a market of perfect competition is

giving a standardized homogeneous product, and, therefore, operating under conditions close to perfect competition.

2. It is of great methodological importance, since it allows - albeit at the cost of large simplifications of the real market picture - to understand the logic of the company's actions. This technique, by the way, is typical for many sciences. So, in physics, a number of concepts are used ( ideal gas, black body, ideal engine) built on the assumptions (no friction, heat loss, etc.), which are never completely fulfilled in the real world, but serve as convenient models for describing it.

The methodological value of the concept of perfect competition will be fully revealed later (see topics 8, 9 and 10), when considering the markets of monopolistic competition, oligopoly and monopoly, which are widespread in the real economy. For now, it is advisable to focus on practical value theory of perfect competition.

What conditions can be considered close to a perfectly competitive market? Generally speaking, there are different answers to this question. We will approach it from the position of the firm, that is, we will find out in what cases the firm in practice acts as (or almost so) as if it were surrounded by a market of perfect competition.

Criterion

perfect

competition

First, let's figure out what the demand curve for the products of a firm operating in conditions of perfect competition should look like. Recall, first, that the firm accepts the market price, i.e., the latter is a given value for it. Secondly, the firm enters the market with a very small part of the total amount 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 output.

Obviously, under such conditions, the demand curve for the firm's products will look like a horizontal line (Fig. 7.2). Whether the firm produces 10 units, 20 or 1, the market will absorb them at the same price P.

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

The presence of perfectly elastic demand for the firm's product is called the criterion of perfect competition. As soon as such a situation develops in the market, the firm begins to

Rice. 7.2. Demand and total income curves for an individual firm under perfect competition

behave like (or almost like) a perfect competitor. Indeed, the fulfillment of the criterion of perfect competition sets many conditions for the company to operate in the market, in particular, determines the patterns of income.

Average, marginal and total revenue of the firm

Income (revenue) of the firm is called payments received in its favor when selling products. Like many other indicators, economic science calculates income in three varieties. total income(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) total revenue divided by the number of products sold. Finally, marginal revenue(MR) represents the additional income generated from the sale of the last unit sold.

A direct consequence of the fulfillment of the criterion of perfect competition is that the average income for any volume of output is equal to the same value - the price of the goods and that the marginal income is always at the same level. So, if the price of a loaf of bread established in the market is 3 rubles, then the bread stall acting as a perfect competitor accepts it regardless of the volume of sales (the criterion of perfect competition is satisfied). 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 3 rubles. (marginal income). And the same amount of revenue will be on average for each loaf 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 in conditions of perfect competition is simultaneously the curve of its average and marginal revenue.

As for the total income (total revenue) of the enterprise, it changes in proportion to the change in output and in the same direction (see Figure 7.2). That is, there is a direct, linear relationship:

If the stall in our example sold 100 loaves of 3 rubles, then its revenue, of course, will be 300 rubles.

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

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

Small business in Russia and perfect competition

The simplest example we have already cited, which is constantly encountered in everyday life, with the trade in bread, suggests that the theory of perfect competition is not as far from Russian reality as one might think.

The fact is that most of the new businessmen started their business literally from scratch: no one had large capitals in the USSR. Therefore, small business has embraced even those areas that in other countries are controlled by big capital. Nowhere in the world do small firms play a significant role in export-import operations. In our country, many categories of consumer goods are imported mainly by millions of shuttles, i.e. not even just small, but the smallest enterprises. In the same way, only in Russia, “wild” brigades are actively engaged in construction for private individuals and renovation of apartments - the smallest firms, often operating without any registration. A specifically Russian phenomenon is also “small wholesale”- this term is even difficult to translate into many languages. In German, for example, wholesale is called "large trade" - Grosshandel, since it is usually carried out on a large scale. Therefore, the Russian phrase “small wholesale trade” is often conveyed by German newspapers with the absurd-sounding term “small-scale trade”.

Shuttle shops selling Chinese sneakers; and atelier, photography, hairdressing; vendors offering the same brands of cigarettes and vodka at metro stations and auto repair shops; typists and translators; apartment renovation specialists and peasants trading in collective farm markets - they all have in common the approximate similarity of the product offered, the insignificant scale of the business compared to the size of the market, the large number of sellers, that is, many of the conditions for perfect competition. Mandatory for them and the need to accept the prevailing market price. The criterion of perfect competition in the sphere of small business in Russia is fulfilled quite often. In general, albeit with some exaggeration, Russia can be called a country-reserve of perfect competition. In any case, conditions close to it exist in many sectors of the economy where new private business (rather than privatized enterprises) predominates.

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

A small investigation showed that the fact is that the most prosperous clients have 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 be connected to a ritual agency, of course, she redirected everyone to her own spouse.

This is a story about unfair competition. And it could have ended differently. Having calculated the losses, the entrepreneur could well close his own agency or kill the telephone operator in a fit of rage. But Almon Strowger acted differently: when complaints to the station’s authorities failed, 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 it, many-sided competition! It can serve as an engine of progress, or, on the contrary, it can become the cause of cruel crimes. And in order to form your own opinion, whether competition is useful to society or dangerous to it, you will have to understand in detail the nature of this phenomenon. Shall we start?

Competition -what is it in simple words

For the first time the word "competition", borrowed from the German "konkurrieren", was 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 in order 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 most adapted 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, as a result, get the maximum profit.

Interestingly, the word "competition" has the same roots as "competition". But in this case we are talking 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, mankind 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 the market exchange.

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

But only in the 18th century did Adam Smith, a Scottish economist and philosopher, become interested in competition as a phenomenon. He drew attention to the fact that there is a stable connection between rival companies. And he suggested that competition is not an accident, but an objectively acting 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 situation in the market: the volume of supply and demand, the size wages, exchange rate. So if average salary sales assistant in Moscow is 40,000 rubles, the company can hardly count on finding, and most importantly, retaining an experienced, conscientious employee by 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 win is to fight to improve the quality of the goods, reduce their own costs, and, following them, 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 the economy

In a market economy, competition has 6 main functions:

1 Regulatory. In conditions of free competition, firms produce exactly as much product as the consumer needs. Equilibrium is not established immediately, the company comes to 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" during the summer season sells 1500 - 1700 budget models "Novichok". If by June the company does not fulfill production plan to meet the demand, she will have to introduce additional shifts, urgently expand the staff, but still not every buyer will agree to wait for their purchase instead of the standard 3 days 2-3 weeks. Part of the profit will be lost. The reverse situation is also losing: excess production entails the need to expand storage facilities, and with them the overall costs of the enterprise.

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

2 Allocation. Its name comes from the English "allocation" - "accommodation". 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 stations are located near large water sources, and the energy they produce supplies the nearby regions. It also makes no sense to install wind farms 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, has been assigned a coefficient of 6. And here the installation of wind power plants will be fully justified.

3 Innovative. The rapid development of technology in modern world is 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 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. So, most grocery stores have either switched to a 24-hour work schedule, or close closer to midnight. This allows customers to buy products after work in a calm mode, and 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 further invest their own resources in existing projects or whether it is time to explore new horizons. So from low-income industries, where there is already a sufficient number of producers or the demand for products is steadily falling, there is constantly an 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 turn the industry into an efficient, self-regulating system. And the aggregate competitive industries creates a more or less successful market economy. That is why competition is often called the engine of the market economy.

Advantages and disadvantages of competition in the market

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

• stimulates the development scientific and technological progress thereby improving the quality of life of the population;
• makes manufacturers respond quickly to consumer requests: expand the range, improve the quality of goods, look for ways to reduce costs;
• forms fair market prices as opposed to the predatory pricing policy of 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 as a whole is the increase in the middle class among the population.

There are also negative points in the competitive environment:

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

Conditions for maintaining competition

Free competition is a very unstable market model. Entrepreneurs left to their own devices first take weak players out of the game. They leave due to lack of resources:

And then viable companies begin to negotiate among themselves: about holding prices and even merging. It is more profitable for firms economically 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 hairdressing salons have opened in the residential area. But the first was opened by a student without initial capital, and the second by an experienced businessman with sufficient capital, who knows well that new business in the first months requires constant injections. At the same prices, the chances of surviving at a hairdressing salon owned by a student are minimal.

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

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

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

1. a ban on the creation of monopolies;
2. strict regulation of prices for products of natural monopolies, for example, fixed rates 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 framework that could support the emerging small and medium business. The first such document was the Law of the RSFSR "On competition and restriction of 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 Protection of Competition in the Financial Services Market”.

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

Control over 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 activity of an enterprise to be recognized as threatening free competition, the share of its products on the market for goods and services must be 65%. But there are exceptions: the antimonopoly committee can impose sanctions already with a share of 35%, if the company prevents new firms from entering the industry and dictates its conditions to competitors.

Participants of competitive relations

Participants of legal relations are called subjects by the legislation. In competition law, the main ones are:

• sellers or business entities, i.e. 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 duties, but acts precisely in their interests. In case of suspicion of violations of the antimonopoly law, 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. Under conditions of free competition, they balance naturally and set economically fair prices.

Other subjects can also influence competitive relations:

These entities do not participate in competition, but are in the field of antimonopoly legislation, as they are able to provide individual companies with significant advantages: issue a license, finance, establish tax incentives. All this negatively affects other participants in the competitive struggle.

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

• a potential seller is one who is ready to start producing and/or selling a product within 1 year that is already on the market at a price not exceeding the average market price by more than 10%. At the same time, production costs will pay off within 12 months;
• a potential buyer is one 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 combine their efforts, the Law defines another subject of competition law - a group of persons. They can be united by relations of any kind: labor or contractual, property or family.

Despite the fact that their actions are coordinated and aimed at achieving the same goal, in the framework of legal proceedings, the degree of participation of each person in a crime is considered individually.

Forms of competition

To stay within the bounds 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 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 conscientious, socially approved, competition ceases to be such.

Fair competition - fair and legal methods of competition that do not conflict with generally accepted business practices:

Unfair competition - any actions of economic entities that are contrary to the law and business ethics and can cause harm business reputation competitors, inflicting financial damage on them.

Methods of unfair competition:

Types of competitive markets

Depending on the severity of competition between firms, there are 4 main types of the market 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, each region has hundreds farms, which provide stores with eggs, milk, vegetables and fruits. Farmers cannot influence the price of their products in any way, and 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 in such a market has its own zest. For example, one publishing house publishes exclusively detective stories, another - women's novels, the third - non-fiction literature. The competition here is non-price, and advertising and brand awareness help to increase.
3. Oligopoly- the 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. Significant financial investments, engineering developments, highly qualified personnel, permits from regulatory authorities, well-thought-out marketing strategy. Of course, few entrepreneurs are able to realize all this. Those who succeed become the few big 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 himself determines the volume of output and has unlimited power over prices. Example: OAO Gazprom, OAO 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 as much as possible in terms of price and quality.

Video: Competition and its types

Types of competition in the economy

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 rare in real life. It is characterized by:

• A very large number of vendors in the industry. They act independently of each other, each working in their own interests. So, 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 several firms increase the 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 from which of the sellers to make a purchase. A striking example: currency exchangers.
• The inability of the seller to influence the price of the goods. For example, if at the 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 one to demand 400 rubles. He simply will not sell the berries, and they will go bad. But lowering prices is also unprofitable 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 serious financial opportunities or technological innovations. They are not hindered by legislative authorities, on the contrary, all information about doing business is freely available. Example: stall trade, the creation of construction and repair teams.

A situation in which one or more of the conditions for perfect competition is not met:

• Although the product from different sellers belongs to the same group, it has its 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 the amount that any potential entrepreneur can easily find;
• There are already leaders in the industry. In this case, we are talking more about oligopolistic competition;
• From the very beginning, the entrepreneur has the opportunity to influence the price of his products. 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 berries 2 weeks earlier, and will be able to sell his crop for much more.

Thus, imperfect competition is a market model that, to varying degrees, but 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 become stable. It implies that the activities of individual entrepreneurs are not affected 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 a few firms achieve a significant market share and are able to influence prices and prevent 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 all legal means: price and non-price.

Market competition is:

• intra-industry:
• intersectoral;
• international.

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

• subject;
• specific.

Subject competition- one in which rival firms produce an identical product. It can only vary slightly in quality. Example: Russian manufacturers bed linen of the middle price category - "SailD", "MONA LIZA", "AMORE MIO".

Species competition- a type of rivalry in which companies produce goods of the same type: shoes, clothes, 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 tailoring orthopedic models.

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

Interethnic competition is the competitive struggle of two countries. Its goal can be not only the conquest of the largest possible market, but also prestige on the world stage. Example: confrontation between the US and the USSR in the field of space exploration.

Competition Methods

There are two ways to try to beat 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 their services. The business owner is well aware that in the future he will not be able to keep such a low price, but in the short term the strategy will provide a large influx of customers, and if they like the service, they are likely to call again and again.

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

For example, at the same prices for bottled water, the Aqua company will also offer free delivery. In terms of the price per liter of water for the buyer will be less. And non-price competition will be the most that neither is price.

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

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 significantly fall in price. Competitors in such a situation have to either follow the more successful firm, or leave the market.

Competition outside economics

Competition as a competition for a good that is available in limited quantities is typical for politics and science, sports and military affairs, art and creativity. Perhaps there is not a single human activity in which it would be impossible for the emergence of a struggle for money, power, fame or respect.

Achieving the goal occurs with the help of competitive actions, a concept formulated by American economist Michael Porter. It involves the commission of acts directly or indirectly addressed to competitors. Their goal is to strengthen their positions and at the same time weaken the opponent.

competition in biology

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

There are two types of competition in biology:

1. Intraspecific competition. The most desperate and cruel, the struggle flares up between representatives of the same species. Birds fight to the death for the best nesting sites, walruses and seals win back a female for mating, and out of hundreds of young Christmas 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 strongest will definitely crowd out the weakest. So, in Australia, the native bee, devoid of sting, has already been almost completely destroyed. And all because a few decades ago, a honey bee was introduced to the mainland.

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. The competition of norms happens:

• temporary, when the norms were in force at 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 there are Federal constitutional laws, after them federal laws etc.

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

Answers on questions

Competitive as spelled

The correct spelling is “competitive” (without the “n”). This word consists of two roots: "competition" - there is no "n" and "capable".

What is a competitor

A competitor is a person or group of persons, and it can also be a company or even a state, that competes with another person(s) for the right to own something or for any 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 her that more and more resistant strains of bacteria and viruses appear on the planet, which are not amenable to known antibiotics and antiviral drugs. Hundreds of animal species and thousands of plant species have become extinct in competition. But those that survived have managed to adapt to droughts and frosts, polluted air and the ubiquitous humanity.

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

Entrepreneurs fear competition and dislike 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 struggle, which unmistakably defines the losers and those who have chosen the right strategy.

Roman Kozhin

The author of the blog "My Ruble", in the past the head of the credit department in the bank. In the present Internet entrepreneur, investor. I talk about how to effectively manage your money, how to increase it profitably, and earn more. Thanks to the Internet, he moved to the sea. You can follow my life in social networks using the links below.

TOPIC 7. PERFECT COMPETITION

7.2. Principal options for the behavior of the firm in the short run

7.2.1. Profit maximization as the main motive of the firm's behavior

7.2.2. Three options for firm behavior

7.3. Rule of Equality of Marginal Cost and Marginal Revenue (MC = MR)

7.4. Supply Curve and Market Equilibrium in a Competitive Industry

7.5. Dynamics of profit and volume of supply in the long run. Perfect competition and economic efficiency

7.5.1. The level of profit as a regulator of attracting resources

7.5.2. Perfect competition and economic efficiency

7.1. Features of a perfectly competitive market

7.1.1. Competition conditions and market type

The behavior of the firm, its choice of production volumes depends on the type of market in which it operates.

The most powerful factor dictating the general conditions for the functioning of a particular market is the degree of development of competitive relations on it.

Etymologically word competition goes back to latin concurrentia, meaning clash, competition. Market competition is the struggle for the limited demand of the consumer, conducted between firms in the parts (segments) of the market accessible to them. In a market economy, competition performs the most important function of counterbalancing and at the same time complementing the individualism of market entities. It forces them to take into account the interests of the consumer, and hence the interests of society as a whole.

Indeed, in the course of competition, the market selects from a variety of goods only those that consumers need. They are the ones that sell. Others remain unclaimed, and their production stops. In other words, outside a competitive environment, an individual satisfies his own interests, regardless of others. In the conditions of competition, the only way to realize one's own interest is to take into account the interests of other persons. Competition is the specific mechanism by which the market economy addresses fundamental questions What? How? For whom to produce?

The development of competitive relations is closely related to splitting economic power. When it is absent, the consumer is deprived of a choice and is forced either to fully agree to the conditions dictated by the manufacturer, or to be completely left without the good he needs. On the contrary, when economic power is split and the consumer deals with many suppliers of similar goods, he is able to choose the one that best suits his needs and financial possibilities.

According to the degree of development of competition, economic theory distinguishes four main types of market:

Þ The market of perfect competition,

monopolistic competition,

an oligopoly

a monopoly.

In a market of perfect competition, the splitting of economic power is maximal and the mechanisms of competition operate in full force. There are many manufacturers operating here, deprived of any leverage to impose their will on consumers.

Under imperfect competition, the splitting of economic power is weaker or non-existent. Therefore, the manufacturer acquires a certain degree of influence on the market.

The degree of market imperfection depends on the type of imperfect competition. In conditions of monopolistic competition, it is small and is associated only with the ability of the manufacturer to produce special varieties of goods that differ from competitors. Under an oligopoly, market imperfection is significant and is dictated by the small number of firms operating on it. Finally, monopoly means that only one manufacturer dominates the market.

Conditions for perfect competition

The market model of perfect competition (SC) is based on four basic conditions (see diagram. 7.1.).

Let's consider them sequentially.

Þ In order for competition to be perfect, the goods offered by firms must meet the condition homogeneity products. This means that the products of firms in the view of buyers are homogeneous and indistinguishable, that is, the products of different enterprises are completely interchangeable1 (they are complete substitute goods).

Under these conditions, no buyer would be willing to pay a hypothetical firm more than he would pay its competitors. After all, the goods are the same, customers do not care which company they buy from, and they, of course, opt for the cheapest. That is, the condition of product homogeneity actually means that the difference in prices is the only reason why the buyer can prefer one seller to another.

Þ Further, under perfect competition, neither sellers nor buyers affect the market situation, due to smallness and multiplicity all market participants. Sometimes both of these sides of perfect competition are combined, speaking of atomistic structure market. This means that there are a large number of small sellers and buyers in the market, just as any drop of water is made up of a gigantic number of tiny atoms.

At the same time, 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 lower or increase their volumes creates neither surpluses nor deficits. The aggregate size of supply and demand simply "does not notice" such small changes.

Þ All of the above limitations (homogeneity of products, large number and small size of enterprises) actually predetermine that under perfect competition, market participants are not able to influence prices. Therefore, it is often said that, under perfect competition, each individual selling firm "gets the price," or is price taker(price taker).

Þ The next condition for perfect competition is no barriers to entry and exit from the market. The fact is that when there are such barriers, 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, typical for perfect competition no barriers or freedom to enter to the market (industry) and leave it means that resources are completely mobile and move from one activity to another without problems. On the other hand, there are no difficulties with the termination of operations in the market. Conditions do not force anyone to stay in the industry if it does not suit their interests. In other words, the absence of barriers means the absolute flexibility and adaptability of a perfectly competitive market.

Þ The last condition for the existence of a perfectly competitive market is that information about prices, technology and likely profits is freely available to everyone. Firms have the ability to quickly and rationally respond to changing market conditions by moving the resources used. There are no trade secrets, unpredictable developments, unexpected actions of competitors. That is, decisions are made by the firm in conditions of complete certainty in relation to the market situation or, which is the same, in the presence of perfect information about the market.

7.1.2. The meaning of the concept of perfect competition

Abstraction of the concept of perfect competition

All four of the above conditions are so stringent that they can hardly be met by at least one really functioning market. Even the markets most similar to perfect competition only partially satisfy them.

For example, world stock (securities market) and commodity (commodity) exchanges quite fully satisfy the first assumption, with a stretch they correspond to the second and third conditions. And none of them satisfies the condition of perfect information (knowledge).

For all its abstractness, the concept of perfect competition plays an exceptionally important role in economics.

First of all, the model of a perfectly competitive market allows one to judge the principles of functioning of very many small firms selling standardized homogeneous products, and, therefore, operating under conditions close to perfect competition.

Secondly, it is of great methodological significance, since it allows - albeit at the cost of large simplifications of the actual market picture - to understand the logic of the firm's actions. This technique, by the way, is typical for many sciences. So, in physics, a number of concepts are used ( ideal gas, black body, ideal engine) built on the assumptions (no friction, heat loss, etc.), which are never fully executed in the real world, but serve as convenient models for describing it.

What conditions can be considered close to a perfectly competitive market? Generally speaking, there are different answers to this question. We will approach it from the position of the firm, that is, we will find out in which cases the firm in practice acts as (or almost so) as if it were surrounded by a market of perfect competition.

7.1.3. Criterion of perfect competition

First, let's figure out what the demand curve for the products of a firm operating in conditions of perfect competition should look like. Recall, firstly, that the firm accepts the market price, that is, the latter is a given value for it. Secondly, the firm enters the market with a very small part of the total amount 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 output.

A perfectly competitive market is characterized by the following features:

Firms produce the same, so that consumers do not care which manufacturer to buy it from. All products 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 arbitrarily small increase in the price of one producer above the market level leads to a reduction in demand for his products to zero. Thus, the difference in prices may be the only reason for preferring one or another firm. No non-price competition.

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

Freedom to enter and exit the market. There are no restrictions and barriers - no patents or licenses restricting activity in this industry, no significant initial investment is required, positive effect the scale of production is extremely insignificant and does not prevent the entry of new firms into the industry, there is no state intervention in the mechanism of supply and demand (subsidies, tax breaks, quotas, social programs etc.). Freedom of entry and exit absolute mobility of all resources, freedom of their movement territorially and from one type of activity to another.

Perfect Knowledge all market participants. All decisions are made in certainty. This means that all firms know their income 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 would 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 profit maximization;
• is the standard for evaluating 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 established by the interaction of market demand and market supply, as shown in Fig. 1 and defines the horizontal demand curve and average income (AR) for each individual firm.

Rice. 1. The demand curve for the products of a competitor

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

Income of a firm that is a perfect competitor

The horizontal demand curve for the products of an individual firm and the single market price (Pe=const) predetermine the shape of the income curves under 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 with a positive slope and originating at the origin, since any sold unit of output increases the 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 amount of output.

A-priory

All income functions are shown in Fig. 2.

Rice. 2. Competitor's income

Determination of the optimal output volume

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

Based on the existing this moment time of market and technological conditions, the firm determines optimal output volume, i.e. the volume of output that provides the firm profit maximization(or minimization if profit is not possible).

There are two interrelated methods for determining the optimum point:

1. The method of total costs - total income.

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 point of optimal production

On fig. 3, the optimizing volume is 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 output. The peak of the total profit curve (p) shows the volume of output at which profit is maximized in the short run.

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

dp/dQ=(p)`= 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 with a change in output per unit.

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

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

2. The method of marginal cost - marginal income.

• Мп=(п)`=dп/dQ,
• (n)`=dTR/dQ-dTC/dQ.

And since dTR/dQ=MR, a dTC/dQ=MC, then total profit reaches its maximum value at such a volume of output at which marginal cost equals marginal revenue:

If marginal cost is greater than marginal revenue (MC>MR), then the company can increase profits by reducing production. 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 structures, however, in conditions of perfect competition, it is somewhat modified.

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

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

The firm operates under perfect competition. Current market price Р=20 c.u. The total cost function has the form TC=75+17Q+4Q2.

It is required 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. MR=P*=20.
• 2. MS=(TC)`=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=P*Q=20Q
• 2. Find the function of total profit:
• n=TR-TC,
• n=20Q-(75+17Q+4Q2)=3Q-4Q2-75.
• 3. We define the marginal profit function:
• Mn=(n)`=3-8Q,
• and then equate Mn to zero.
• 3-8Q=0;
• Q=3/8.

Solving this equation, we got the same result.

Short-term benefit condition

The total profit of the enterprise can be estimated in two ways:

• P=TR-TC;
• P=(P-ATS)Q.

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

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

It follows that a firm's profit (or loss) in the short run depends on the ratio of its average total cost (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 a positive economic profit in the short run;

Positive economic profit

In the figure, total profit corresponds to the area of ​​the shaded rectangle, and average profit (ie 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 R*<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 breakeven, and the firm earns only normal profit.

Zero economic profit

Termination Condition

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

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

The firm 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 earnings ( 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>AVC,

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

If price equals average variable cost

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

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

Production termination condition

Let us prove the validity of these arguments.

A-priory, n=TR-TS. If a firm maximizes its profit by producing the nth number of products, then this profit ( n) must be greater than or equal to the profit of the firm under the conditions of closing the enterprise ( on), 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, the firm minimizes its losses in the short run, continuing to operate.

Intermediate conclusions for this section:

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

The ratio between the price ( R) and average total cost ( ATS) shows the amount of profit or loss per unit of output while continuing production.

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

Competitor's short run supply curve

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

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

Competitor's supply curve

Let's assume that the market price is Ro, and the average and marginal cost curves look like those in Fig. 4.8.

Insofar as Ro(closing points), then the firm's supply is zero. If the market price rises to a higher level, then the equilibrium output will be determined by the relation MC and MR. The very point of the supply curve ( Q;P) will lie on the marginal cost curve.

By consistently raising the market price and connecting the resulting points, we get a short-run supply curve. As can be seen from the presented Fig. 4.8, for a firm-perfect competitor, 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: Defining a sentence function

It is known that a firm-perfect competitor has total (TC), 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 firm's supply function under perfect competition.

1. Find MS:

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

2. Equate MC to the market price (condition of market equilibrium under perfect competition MC=MR=P*) and get:

2+(Q-2) 2 = P or

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

However, we know from the preceding material that the supply quantity Q=0 for P

Q=S(P) at Pmin AVC.

3. Determine the volume at which the 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 equals 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 involves:

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

In the long term:

• all resources are variable, which means that the company operating in the market can change the size of production, introduce new technology, modify products;
• a change in the number of enterprises in the industry (if the profit received by the firm is below 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).

Main assumptions of the analysis

To simplify the analysis, suppose that the industry consists of n typical enterprises with same cost structure, and that the change in the output of incumbent firms or the 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 firm in the short run has the form of curves SATC1 and SMC1(Fig. 4.9).

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

The mechanism of formation of long-term equilibrium

Under these conditions, the firm's optimal output in the short run is q1 units. The production of this volume provides the company positive economic profit, since the market price (P1) exceeds the firm's average short-term cost (SATC1).

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

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

The emergence of new firms in the industry and the expansion of old firms shifts the market supply curve to the right to the position S2(as shown in Fig. 9). The market price falls from P1 before R2, and the equilibrium volume of industry output 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 the level q3, then the industry supply curve will shift even more to the right to the position S3, and the equilibrium price falls to the level P3, lower than min SATC. This will mean that firms will no longer be able to extract even normal profits and a gradual outflow of companies in more profitable areas of activity (as a rule, the least efficient ones leave).

The rest of the enterprises will try to reduce their costs by optimizing the size (i.e., by some reduction in the scale of production to q2) to a level at which SATC=LATC, and it is possible to obtain a normal profit.

Shifting the industry supply curve to the level Q2 cause the market price to rise to R2(equal to the minimum long-run average cost, P=min LAC). At a given price level, the typical firm earns no economic profit ( economic profit is zero, n=0), and is only able to extract normal profit. Consequently, the motivation for new firms to enter the industry disappears and a long-run equilibrium is established in the industry.

Consider what happens if the equilibrium in the industry is disturbed.

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

If the market price ( R) is set above the average long run costs of a typical firm, i.e. P>LATC, then the firm begins to earn a positive economic profit. New firms enter the industry, market supply shifts to the right, and with market demand unchanged, price falls to the equilibrium level.

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

Basic conditions for long-run 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 an industry cannot, in the long run, reduce total average costs and profit by scaling up production. This means that in order to earn a normal profit, a typical firm must produce a volume of output corresponding to a minimum of average long-term total costs, i.e. P=SATC=LATC.

In conditions long run equilibrium consumers pay the lowest economically possible price, i.e. the price required to cover all production costs.

Market supply in the long run

The individual firm's long-run supply curve coincides with the rising leg of the 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 resource prices change in the industry.

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

• with fixed costs;
• with increasing costs
• with decreasing costs.

Industries with fixed costs

The market price will rise to P2. The optimal output of an individual firm will be equal to Q2. Under these conditions, all firms will be able to earn economic profits by inducing other firms to enter the industry. The industry short-run supply curve shifts 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 lie in the abundance of resources, so that new firms will not be able to influence the prices of resources and increase costs. operating firms. As a result, the typical firm's LATC curve will remain the same.

Rebalancing 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 profit. Thus, industry output increases (or decreases) following a change in market demand, but the supply price in the long run remains unchanged.

This means that a fixed cost industry is a horizontal line.

Industries with rising 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 wider use of resources. As a result of competition between firms, resource prices increase, and as a result, the costs of all firms (both existing and new ones) in the industry increase. Graphically, this means an upward shift in the marginal and average cost curves of the typical firm from SMC1 to SMC2, from SATC1 to SATC2. The short run firm's supply curve also shifts to the right. The adjustment process will continue until economic profits dry up. On 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, the typical firm chooses the output at which

P2=MR2=SATC2=SMC2=LATC2.

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

Industries with diminishing costs

Analysis of the long-term equilibrium of industries with decreasing costs is carried out according to a similar scheme. Curves D1,S1 - 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 the 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 rises to a level that allows firms to earn economic profits. New companies begin to flow into the industry, and the market supply curve shifts to the right. The expansion of production leads to lower prices for resources.

This is a rather rare situation in practice. An example is a young industry emerging in a relatively undeveloped area where the resource market is poorly organized, marketing is primitive, and the transportation system is poorly functioning. 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 firm cannot control such processes, this kind of cost reduction is called foreign economy(English external economies). It is caused solely by the growth of the industry and by 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 and completely under its control.

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

TCi=f(qi,Q),

where qi- the volume of output of an individual firm;

Q is the output of the entire industry.

In industries with fixed costs, there are no external economies; the cost curves of individual firms do not depend on the output of the industry. In industries with increasing costs, there is negative external diseconomies, the cost curves of individual firms shift upwards with an increase in output. Finally, in industries with decreasing costs, there is a positive external economy that offsets internal uneconomics 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, industries with increasing costs are most typical. Industries with diminishing costs are the least common. As industries with decreasing and fixed costs grow and mature, they are more likely to become industries with increasing costs. On the contrary, technological progress can neutralize the rise in resource prices and even cause them to fall, resulting in a downward long-run 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.