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11.1 Perfect competition

We have already defined that the market is a set of rules, using which buyers and sellers can interact with each other and carry out transactions (transactions). Over the history of the development of economic relations between people, markets are constantly undergoing transformations. For example, 20 years ago there was no such abundance electronic markets that are available to the consumer now. Consumers couldn't buy the book, household appliances or shoes, simply by opening the website of the online store and making a few clicks with the mouse.

At the time when Adam Smith began to talk about the nature of markets, they were arranged something like this: most of the goods consumed in European economies were produced by a multitude of manufactories and artisans who used mainly manual labor. The firm was very limited in size, and employed only a few dozen workers at the most, and most often 3-4 workers. At the same time, there were quite a lot of such manufactories and artisans, and they were producers of fairly homogeneous goods. The variety of brands and types of products that we are used to in modern society there was no consumption then.

These signs led Smith to conclude that neither consumers nor producers have bargaining power, and the price is set freely by the interaction of thousands of buyers and sellers. Observing the features of the markets in the late 18th century, Smith came to the conclusion that buyers and sellers are guided towards equilibrium by an "invisible hand". The characteristics that were inherent in the markets at that time, Smith summarized in the term "perfect competition" .

A perfectly competitive market is a market with many small buyers and sellers selling a homogeneous product under conditions where buyers and sellers have the same information about the product and each other. main conclusion Smith's "invisible hand" hypothesis has already been discussed by us - a perfectly competitive market is able to provide an efficient allocation of resources (when a product is sold at prices that exactly reflect the firm's marginal cost of producing it).

Once upon a time, most markets were really similar to perfect competition, but in the late 19th and early 20th centuries, when the world became industrial, and in a number of industrial sectors (coal mining, steel production, construction railways, banking) formed monopolies, it became clear that the model perfect competition no longer suitable for describing the real state of affairs.

Modern market structures are far from the characteristics of perfect competition, so perfect competition is currently an ideal economic model (like an ideal gas in physics), which is unattainable in reality due to the numerous forces of friction.

The ideal model of perfect competition has the following characteristics:

1. Many small and independent buyers and sellers unable to influence the market price
2. Free entry and exit of firms, i.e. no barriers
3. The market sells a homogeneous product that does not have qualitative differences
4. Product information is open and equally available to all market participants

Under these conditions, the market is able to allocate resources and goods efficiently. The criterion for the efficiency of a competitive market is the equality of prices and marginal costs.

Why does allocative efficiency arise when prices equal marginal cost and is lost when prices do not equal marginal cost? What is market efficiency and how is it achieved?

To answer this question, it suffices to consider simple model. Consider potato production in an economy of 100 farmers whose marginal cost of potato production is an increasing function. The 1st kilo of potatoes costs $1, the 2nd kilo of potatoes costs $2, and so on. None of the farmers has such differences in production function which would enable him to competitive advantage over the rest. In other words, none of the farmers have bargaining power. All potatoes sold by farmers can be sold at the same price, determined in the market for balances of general demand and total supply. Consider two farmers: farmer Ivan produces 10 kilograms of potatoes per day at a marginal cost of $10, and farmer Michael produces 20 kilograms at a marginal cost of $20.

If the market price is $15 per kilogram, then Ivan has an incentive to increase potato production because each additional product and kilogram sold earns him an increase in profits, as long as his marginal cost does not exceed $15. For similar reasons, Mikhail has an incentive to reduction in production volumes.

Now imagine next situation: both Ivan and Mikhail, and other farmers initially produce 10 kilograms of potatoes, which they can sell at 15 rubles per kilogram. In this case, each of them has incentives to produce more potatoes, and the current situation will be attractive for the arrival of new farmers. Although each of the farmers has no influence on the market price, their joint efforts will lead to a fall in the market price to a level until the opportunities for additional profit for each and every one are exhausted.

Thus, thanks to the competition of many players in conditions of complete information and a homogeneous product, the consumer receives the product at the lowest possible price - at a price that only breaks the marginal cost of the producer, but does not exceed them.

Now let's see how equilibrium is established in the perfectly competitive market in graphical models.

The equilibrium market price is established in the market as a result of the interaction of supply and demand. The firm accepts this market price as given. The firm knows that at this price it will be able to sell as many goods as it likes, so there is no point in lowering the price. If the firm raises the price of a product, it will not be able to sell anything at all. Under these conditions, the demand for the product of one firm becomes perfectly elastic:

The firm takes the market price as given, i.e. P = const.

Under these conditions, the firm's revenue schedule looks like a ray coming out of the origin:

Under perfect competition, a firm's marginal revenue is equal to its price.
MR=P

This is easy to prove:

MR = TR Q ′ = (P * Q) Q ′

Because the P = const, P can be taken out of the sign of the derivative. As a result, it turns out

MR = (P * Q) Q ′ = P * Q Q ′ = P * 1 = P

MR is the tangent of the slope of the straight line TR.

A perfectly competitive firm, like any firm in any market structure, maximizes total profit.

A necessary (but not sufficient condition) for maximizing the firm's profit is the zero derivative of profit.

R Q ′ = (TR-TC) Q ′ = TR Q ′ - TC Q ′ = MR - MC = 0

Or MR=MC

That is MR=MC is another entry for the profit condition Q ′ = 0.

This condition is necessary but not sufficient for finding the maximum profit point.

At the point where the derivative is equal to zero, there may be a minimum of profit along with a maximum.

A sufficient condition for maximizing the firm's profit is to observe the neighborhood of the point where the derivative is equal to zero: to the left of this point, the derivative must be greater than zero, to the right of this point, the derivative must be less than zero. In this case, the derivative changes sign from plus to minus, and we get a maximum, not a minimum, of profit. If in this way we have found several local maxima, then to find the global profit maximum, you should simply compare them with each other and choose the maximum profit value.

For perfect competition, the simplest case of profit maximization looks like this:

More complex cases of profit maximization will be discussed graphically in the appendix in the chapter.

11.1.2 The supply curve of a perfectly competitive firm

We realized that a necessary (but not sufficient) condition for maximizing the firm's profit is the equality P=MC.

This means that when MC is an increasing function, the firm will choose points on the MC curve to maximize profits.

But there are situations when it is beneficial for the firm to leave the industry, instead of producing at the point of maximum profit. This happens when the firm, being at the point of maximum profit, cannot cover its variable costs. In this, the firm incurs losses that exceed fixed costs.
The firm's optimal strategy is to exit the market, because in this case it receives losses exactly equal to fixed costs.

Thus, the firm will stay at the point of maximum profit, and not leave the market when its revenue exceeds variable costs, or, equivalently, when its price exceeds average variable costs. P>AVC

Let's look at the chart below:

Of the five marked points where P=MC, the firm will remain in the market only at points 2,3,4. At points 0 and 1, the firm will choose to leave the industry.

If we consider all possible options location of the line P, we will see that the firm will choose points lying on the marginal cost curve, which will be higher than AVC min.

So the supply curve competitive firm can be built as part of the MC above AVC min.

This rule is applicable only for the case when the curves MC and AVC are parabolas. Consider the case where MC and AVC are straight lines. In this case, the function total costs is an quadratic function: TC = aQ 2 + bQ + FC

Then

MC = TC Q ′ = (aQ 2 + bQ + FC) Q ′ = 2aQ + b

We get the following graph for MC and AVC:

As can be seen from the graph, when Q > 0, the MC graph always lies above the AVC graph (because the straight line MC has an angle of inclination 2a, and the straight line AVC slope angle a.

11.1.3 Short-run equilibrium of a perfectly competitive firm

Recall that in short term A firm has both variable and fixed factors. So, the costs of the firm consist of a variable and a fixed part:

TC = VC(Q) + FC

The firm's profit is p \u003d TR - TC \u003d P * Q - AC * Q \u003d Q (P - AC)

At the point Q* The firm achieves maximum profit because it P=MC (necessary condition), and the profit changes from increasing to decreasing (sufficient condition). On the graph, the profit of the firm is depicted as a shaded rectangle. The base of the rectangle is Q*, the height of the rectangle is (P-AC). The area of ​​the rectangle is Q * (P - AC) = p

That is, in this variant of equilibrium, the firm receives economic profit and continues to operate in the market. In this case P > AC at the point of optimal release Q*.

Consider the equilibrium where the firm earns zero economic profit

In this case, the price at the optimum point is equal to the average cost.

A firm can earn even negative economic profits and still continue to operate in the industry. This happens when, at the point of optimum, the price is lower than the average, but higher than the average variable costs. The firm, even receiving economic profit, covers the variable and part of the fixed costs. If the firm leaves, then it will bear all the fixed costs, so it continues to operate in the market.

Finally, the firm exits the industry when, at optimal output, its revenue does not even cover variable costs, that is, when P< AVC

Thus, we have seen that a competitive firm can earn positive, zero, or negative profits in the short run. The firm leaves the industry only when, at the point of optimal output, its revenue does not even cover variable costs.

11.1.4 Equilibrium of a competitive firm in the long run

The difference between the long run and the short run is that all factors of production for the firm are variable, that is, there are no fixed costs. Just as in the short run, firms can freely enter and exit the market.

Let us prove that in the long run the only stable state of the market is one in which the economic profit of each firm tends to zero.

Let's consider 2 cases.

Case 1 . The market price is such that firms earn a positive economic profit.

What will happen to the industry in the long run?

Since information is open and publicly available, and there are no market barriers, the presence of positive economic profits for firms will attract new firms to the industry. Entering the market, new firms shift market supply to the right, and the equilibrium market price falls to a level at which the opportunity for positive profits has not been completely exhausted.

Case 2 . The market price is such that firms earn negative economic profits.

In this case, everything will happen in the opposite direction: since firms earn negative economic profit, some firms will leave the industry, supply will decrease, the price will rise to a level at which the economic profit of firms will not become zero.

7.3.1. Equilibrium of firm and industry in the long run

The level of profit as a regulator of attracting resources

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

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

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

economic

The relationship between the level of profitability in competitive industry and the size of the use of resources in it, and hence the volume of supply, predetermines

break-even of firms operating in a competitive industry in the long run(or equivalently, their receipt zero economic profit). The mechanism of establishment of zero economic profit is shown in fig. 7.14.

Let in a competitive industry (Fig. 7.14 b) initially there is an equilibrium (point O) that dictates a certain price level P Q at which the firm (Fig. 7.14 a) earns zero profit in the short run. Suppose further that the demand for the products of the industry suddenly increased. The industry demand curve D 0 in this situation will move to position D L , and a new short-term equilibrium will be established in the industry (equilibrium point 0 L , equilibrium supply Q t , equilibrium price R d). For the firm, the new higher price level will be a source of economic profit (the price lies above the level of the average total costs of ATC).

Economic profits will attract new producers to the industry. The consequence of this will be the formation of a new supply curve S 2 , shifted compared to the original in the direction of large volumes of production. A new, slightly lower price level P 2 will also be established. If economic profits are maintained at this price level (as in our diagram), then the influx of new firms will continue, and the supply curve will shift further to the right. In parallel with the influx of new firms into the industry, the supply in the industry will also increase under the influence of the expansion of production capacities by firms already operating in the industry. Gradually, all of them will reach the level of minimum average long-term costs (LATC), that is, they will reach the optimal size of the enterprise (see 6.4.2).

Rice. 7.14.

Obviously, both of these processes will last until the supply curve takes position S 3 , which means zero profits for firms. And only then will the influx of new firms dry up - there will no longer be an incentive for it.

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

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

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

long-term

equilibrium

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

• 1) the conditions of short-term equilibrium are satisfied, i.e. short-term marginal cost is equal to short-term marginal revenue and price (P = MR = MC);
• 2) each of the firms is satisfied with the volumes of used production capacities (short-term average total costs are equal to the least possible long-term average costs ATC. = LATC.);
• 3) the firm receives zero economic profit, i.e. there is no excess profit, and therefore there are no firms willing to enter the industry or leave it (P = ATC min).

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

Long run industry supply curve

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

Rice. 7.15. Long term curve

offers for the industry with constant (a), growing (b) and falling (in) costs

Indeed, the equilibrium points O and 0 3 in fig. 7.14 actually outline the position of the long-run supply curve. They show that in the long run a competitive industry is able to provide any amount of supply at the same price P Q . Indeed, repeating the above chain of reasoning, it is easy to come to the following conclusion: no matter how demand changes, the supply will react in such a way that, in the end, the equilibrium point will again return to the level corresponding to the level of zero economic profit for firms operating in the industry.

So the general principle is that The long-run supply curve of a competitive industry is the line through the break-even points for each level of production. On fig. 7.15 shows different variants of the manifestation of this pattern.

Industries with fixed costs

In the specific example we have considered (see Fig. 7.14), such a line is a straight line parallel to the x-axis and corresponding to the absolute elastic

offer. The latter, however, does not always take place, but only in the so-called industries with fixed costs. That is, in those cases when, with the expansion of its supply, the industry has the opportunity to purchase the necessary resources at constant prices.

As a rule, this condition is met for industries that are relatively small relative to the scale of the entire economy. For example, the growth in the number of gas stations in Russia does not create tension in any of the resource markets that firms enter during construction petrol stations. Apart from inflation, the creation of reservoirs, the purchase of pumps, the hiring of personnel, etc. the construction of each additional station costs approximately the same amount (the differences can only be related to its size and design). Consequently, the break-even level at which the price of gas station services will freeze under the influence of competition will always be the same. We have depicted this situation in Fig. 7.15 a, combining on the same graph the long-term supply curve of the industry (S L) and the cost curves of a typical firm (ATS 1, ATC 2, ATC 3), corresponding to a given level of industry-wide production.

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

Industries with rising costs

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

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

With an increase in long-term costs, newcomers to the industry will reach the level of zero economic profit at a higher price than old-timers. If we turn again to Fig. 7.14, then we can say that the influx of new firms into the industry will not bring supply to the level of the S 3 curve, but will stop earlier, say, at position S 2, at which firms will be in a new (taking into account the rise in price of resources) break-even position. It is clear that the long-term supply curve (S L) will pass in this case not along the horizontal trajectory O-0_, but along the ascending curve O-

In a bypassed form, the same is shown in Fig. 7.15 b. As the volume of production in the industry grows, the break-even points of the firms operating in it will be reached with a consistent increase in prices (from P to P 3). This will cause the curve S L to rise.

Costs increase especially rapidly if firms in the industry use unique factors of production:

• a) especially gifted highly qualified specialists;
• b) soils of increased fertility;
• c) mineral resources that are available only in certain regions, etc.

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

Industries with falling costs

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

The long-run supply curve of an industry with falling costs has a negative slope (Fig. 7.15 in).

Such a super-favorable development of events is usually associated with economies of scale in the production of suppliers of resources (raw materials, equipment, etc.) for this industry. For example, it is likely that as the population grows and becomes stronger farms in Russia, their costs will experience a long-term reduction. The fact is that machines and equipment adapted for farmers are now produced literally by the piece, and therefore very expensive. With the appearance of mass demand for them, production will be put on stream and the cost will drop sharply. Farmers, on the other hand, feeling a decrease in costs (in Fig. 7.15 from ATCj to ATC 3) will themselves begin to reduce the price of their products (falling curve

7.3.2. Perfect competition and economic efficiency

Advantages

perfect

competition

Starting to characterize the positive and negative features of the market of perfect competition, let us reproduce once again the condition of long-term equilibrium in a competitive industry and analyze its economic meaning:

• 1. First of all, attention is drawn to the fact that the equilibrium is established at the level of the long-term and short-term minimum of average costs. This clearly indicates that production under conditions of perfect competition is organized in the most technologically efficient way.
• 2. No less important is the fact that both the firm and the industry operate without surpluses and deficits. Indeed, the demand curve under perfect competition coincides with the marginal revenue curve (D = MR), and the supply curve coincides with the marginal cost curve (S = MC). Therefore, the condition of long-term equilibrium in a competitive industry is actually equivalent to the identity of supply and demand for this product(since MR = MC, then S=D). Therefore, we can say that perfect competition leads to the optimal distribution of resources: the industry involves them in production exactly to the extent necessary to cover effective demand.
• 3. Finally, the breakeven of firms in the long run (P = LATC min) is also of fundamental importance. On the one hand, this guarantees industry stability: firms do not incur losses. On the other hand, there are no economic profits, i.e., incomes are not redistributed in favor of this industry from other sectors of the economy.

The combination of these advantages undoubtedly makes perfect competition one of the most effective types of market. In fact, when economists talk about market self-regulation, automatically leading the economy to a state of optimum- and such a tradition goes back to Adam Smith, we can talk about perfect competition and only about her. Under none of the types of imperfect competition, the long-term equilibrium does not have the listed set of properties: the minimum level of costs, the optimal distribution of resources, the absence of deficits and surpluses, the absence of excess profits and losses.

Flaws

perfect

competition

Perfect competition is not without its drawbacks.

• 1. Small businesses typical of this type of market are often unable to use the most efficient technique. The fact is that economies of scale are often available only to large firms.
• 2. The market of perfect competition does not stimulate scientific technical progress. Indeed, small firms usually do not have enough funds to finance long and expensive research and development projects.

Thus, for all its merits, the market of perfect competition should not be an object of idealization. The small size of companies operating in the market of perfect competition makes it difficult for them to operate in a modern, saturated with large-scale technology and permeated innovation processes the world.

Control questions

• 1. What are the conditions and criteria for perfect competition?
• 2. Give examples from Russian reality, when the conditions of perfect competition are partially met. Is the role of this type of market in the economy of our country, in your opinion, significant?
• 3. What are the principal options for the firm's behavior in the short and long term?
• 4. What is the phenomenon of bankruptcy and its role in modern Russia?
• 5. What are the ways for Russian enterprises to reach the break-even point?
• 6. Why is the maximum profit achieved by the firm at the point of equality of marginal revenue and costs?
• 7. Describe the competitive firm's supply curve.
• 8. What role does the absence of barriers play in establishing zero economic profit in the long run in a perfectly competitive market?
• 9. Can perfect competition be considered the most efficient type of market? Give your reasoning.

In conditions of perfect competition, homogeneous goods are produced, often being completely identical. For the buyer, it does not matter which company to buy them from, if the price is the same. At any price above the market, demand is zero, since the buyer is not interested in purchasing the product for more than he can pay. Thus, the demand for the output of an individual seller is perfectly elastic.

The situation under consideration can also be approached from the other side. If the firm is a price taker, then it can sell any quantity of output at the market price. In any case, its supply to the market does not fundamentally change the total volume of the industry supply. It makes no sense to sell cheaper if everything can be sold at a given market price.

The firm will not be able to sell more expensive: in this case, the demand for its products will immediately fall to zero (after all, consumers can easily buy the same goods from other manufacturers at the market price). Thus, the market will accept the firm's products only at the market price. In this regard, the demand curve for the company's products will be a horizontal straight line, spaced from the horizontal axis by a height equal to the market price of the product (Fig. 1.).

It is interesting to note that this same line will simultaneously be the graph of the average and marginal revenues of the firm. For each new unit of a product sold, the firm's income will increase by an amount equal to the price of that product. The average income per unit of a product will also be equal to its price. Thus, D=MR=AR (Fig. 2).

As for the total income of the firm, it can be easily calculated using the P*Q formula.

Fig.2.

To characterize the behavior of a firm, an enterprise, the concepts of gross, average and marginal income are important.

Gross income, or gross revenue TR (total revenue) - the total amount of proceeds from the sale of a certain amount of goods TR = PCHQ, where P is the price of the goods sold, Q is the volume of sales. Average income, or average revenue AR (average revenue), is defined as income per unit of goods sold AR=TR/Q. Marginal revenue, or marginal revenue MR (marginal revenue) - an increase in income arising from an additional increase in output MR = DTR / DQ. Usually DQ is taken equal to 1.

Graphically, the value of the total, or gross, income can be illustrated using the example of the rectangle OP1TQ1 in (Fig. 2) or depicted as a special curve (Fig. 3). Under perfect competition, the total income curve is a straight line through the origin.

A number of corollaries follow from the above definitions.

Consequence 1. Gross revenue of the seller in conditions of pure competition is directly proportional to the quantity of goods sold (Fig. 3).

Consequence 2. Average revenue seller in conditions of pure competition is the price of the goods (Fig. 2).

Corollary 3. The marginal revenue (MR) of a seller under pure competition is the price of the good.

MR=TR: DQ=DPQ: DQ=PDQ:Q=P

A set of homogeneous firms producing products of the same nomenclature forms an industry. It is the total output of the industry as a whole that forms the total volume of supply, and also affects the market price. Under such conditions, the magnitude of demand is different at different price levels. The sectoral (market) demand curve is a descending curve and can be depicted both in the form of a conditional straight line and in the form of a curve (Fig. 4). This is explained by the fact that the demand for those products that are offered by producers in perfectly competitive markets can have both the same and different elasticity in different parts of the aggregate demand curve of the industry (this is due to the nature of the product itself, the current macroeconomic situation, determining the current and expected level of income and savings of consumers) in contrast to the demand curve of an individual firm, which is absolutely elastic (see Fig. 1).

Fig.4.

Fig 5.

The equilibrium of a perfectly competitive firm, like any other economic entity, is understood as a situation where the enterprise does not have any incentives to change its state, and any imbalance can only worsen its position (reduce income).

It would be erroneous to assume that the firm (in the short run) always earns economic profit. Moreover, not always the firm can get a normal profit. The situation on the market may be unfavorable, and the market price may be so low that the total average cost will not be fully compensated, and therefore there will be no normal profit.

In the short run, a perfectly competitive firm will be able to operate either at a profit or at a loss. This fact is explained by the fact that the short-term period is essentially insufficient time intervals in order to expand or reduce production (including in any way influence the change in the level fixed costs production, which in some industries are decisive in relation to the decision to start or continue doing business in this industry), as well as in order to leave the industry. The period of time during which this can be done will no longer be short-term in itself, but will be either medium-term or long-term. Getting zero profit is possible as a special case, so the company seeks to maximize profits or minimize losses. In both cases we are talking about the choice of the optimal volume of production. Let's consider both options.

Under the condition of working with a profit (Fig. 5), the enterprise has a positive difference between the total revenue TR and the total costs TC. This is the total profit of the firm. Per unit of output, the profit will be the difference between the price P and the average total cost of ATC. The presence of profit means that the price line (equal to the marginal revenue MR) will pass above the minimum average cost point, crossing the ATC curve (Fig. 5).

What is the optimal output volume? The one at which the total profit reaches the maximum value. The situation that meets this requirement is equilibrium. In the figure, it corresponds to point E, where the curves of price P and marginal cost MC intersect. This point is characterized by the equilibrium output QE and the equilibrium price PE. The latter (in the figure - segments OPE and QEE equal to each other) includes average costs and average profit MPE=KE.

The total revenue, equal to the product of the price and the volume of production TR=P*Q, in equilibrium will be represented by the area of ​​the rectangle OPEEQE. The total costs of the firm in an equilibrium situation is the product of average costs and the volume of output TC=ATC*Q. in the figure, this is the area of ​​the rectangle OMKQE. In this case, the total profit, i.e. the difference between total revenue and total costs will be represented by the area of ​​the MPEK rectangle. This area and, accordingly, the amount of total profit will be maximum in an equilibrium situation.

Thus, the amount of total profit reaches a maximum at such output, in which the marginal revenue (price) is equal to the marginal cost: MC=MR(P).

It is this equality that characterizes the equilibrium condition for a perfectly competitive firm in the short run.

The short-run supply curve discussed above describes the operational response of a profit-maximizing or loss-minimizing firm to short-term current fluctuations in the price of a good. However, the entrepreneur is interested not only in the immediate result, but also in the prospects for the development of the enterprise. The main strategic criterion is to obtain a stable income stream by actively reaching the most efficient production volumes in accordance with the market forecast in the long term.

The long run differs from the short run in that, first, the producer can increase production capacity (so all costs become variable) and, second, the number of firms in the market can change. In other words, a firm can curtail production (go out of business) or start producing new types of products (enter the business), and in conditions of perfect competition, entry and exit to the market for new firms is absolutely free. There are no legal or economic barriers of any kind.

Free entry into the industry and equally free exit from it is one of the main features of the market of perfect competition. Freedom of entry, of course, does not mean that a firm can enter an industry without incurring any costs. This means that it has made all the necessary investments to enter the industry and competes with already existing enterprises. In such a situation, new firms do not get in the way of new restrictions associated with the operation of patents and licenses, with the presence of explicit or implicit collusion. Similarly, freedom of exit means that a firm wishing to leave an industry will not encounter any barriers in its path that prevent the enterprise from closing or moving its activities to another region. At the same time, when a firm leaves the industry, it either finds a new use for its permanent assets, or sells them without prejudice to itself.

If a firm has economic profit in the short run, then its production becomes more attractive to other producers. New firms enter the market of a competitive product, diverting a part of effective demand to themselves. To sell successfully this enterprise forced to reduce prices or incur additional costs to support sales. Profits are falling, the influx of competitors is decreasing.

In the case of unprofitable production, the picture is reversed: some firms will be forced to leave the industry, which will lead to an increase in the demand price for other firms. This process will continue until the price at least covers the average costs of the remaining firms in the industry, i.e. P=ATS. If the process of firms leaving the industry continues, then the price increase will lead to its excess over the average costs for the remaining firms in the industry and, consequently, to the receipt of economic profits by these firms, which in turn will serve as a signal for the entry of new firms into the industry.

The process of entry and exit will stop only when there is no economic profit. A firm making zero profits has no incentive to exit, and other firms have no incentive to enter. There is no economic profit when the price coincides with the minimum of average costs, i.e. the firm belongs to the "marginal" type. In this case, we are talking about long-term average costs (LAC).

Long run average cost is the cost of producing a unit of output in the long run. Each point (LAC) corresponds to the minimum short-term unit cost (ATC) for any size of the enterprise (output). The nature of the long-term cost curve is associated with the concept of economies of scale, which describes the relationship between the scale of production and the amount of costs. Positive effect scale is characterized by a descending branch of the LAC and characterizes the inverse relationship between average long-term costs and the size of the firm (Fig. 6). The negative effect of scale (in the figure - the ascending branch of the LAC) expresses a direct relationship between these quantities. The minimum long-term costs determine optimal size enterprises. If the price is equal to the minimum long-run unit cost, the profit of the firm in the long run is zero.

Fig.6.

Thus, the condition of the firm's long-term equilibrium is the equality of the price to the minimum of long-term unit costs (P=minLAC).

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

The firm's long-run supply curve, like the short-run supply curve, is the portion of the long-run marginal cost (LAC) curve above point E, the minimum long-run unit cost. If the price falls below this point, then the firm does not cover all costs and should leave the industry.

The market supply curve is obtained by summing the long-term supply of individual firms. However, unlike in the short run, the number of firms can change in the long run.

So what makes firms get involved if economic profits are zero in the long run? It's all about the possibility of obtaining high short-term profits. To ensure this possibility by changing the situation of short-term equilibrium, the impact of external factors, in particular changes in demand, can. An increase in demand will bring short-term economic profit. In the future, the action will unfold according to the scenario already described above. In this case, there are 3 options for changing the industry proposal:

1. the offer price is unchanged;

2. the offer price increases;

3. The offer price is reduced.

The implementation of one or another option is determined by the degree of dependence between the change in the volume of output and the change in the offer price. The level of the offer price, in turn, is determined by the amount of costs, hence the cost of resources. Here you can define 3 options (Fig. 7a, b, c).

Fig.7

1. Prices for resources are unchanged. This is possible when the demand of a particular industry for resources is a small part of the total demand. The industry can expand without significant impact on prices and costs. The expansion or contraction of an industry affects only the volume of production and does not affect the price. An increase in demand means a shift of the corresponding curve to the right upwards, towards more high price. Since any firm in the industry is in the position of being a price taker, it will view the price increase as external factor and respond to it by increasing the volume of production from Q1 to Q2 (Fig. 7a.). Attracting new firms to production and tightening the competition regime leads to an increase in market supply to Q3 and a price reduction to its original level. Thus, the long-term equilibrium of the firm is restored, and the supply curve of the industry is a perfectly horizontal line.

We have considered industries with fixed costs. As a rule, we are talking about the use of traditional resources used by other industries.

2. Resource prices go up. Most industries use specific resources, the number of which is limited. Their application determines the upward nature of the costs of the industry. As the industry expands, the average cost curve shifts up, i.e. the entry of new firms affects the prices of inputs, hence the magnitude of costs. The entry of new firms increases the demand for resources and raises the price. Therefore, the industry will produce more products only at a higher price (Fig. 7.b). This refers to an industry with increasing costs.

3. resource prices are falling. The long-run supply curve has a negative slope. With the consolidation of the industry, it has the opportunity to acquire more factors of production at a lower price. In this case, firms' average cost curves shift downwards and the market price of the product falls. This leads to a new long-run equilibrium in an industry with more firms, more output, and lower prices. Consequently, in the area with declining costs, the long-term aggregate supply curve of the industry has a downward slope (Fig. 7.c).

In any case, in the long run, the supply curve of the industry will be flatter than the short-run supply curve, since, firstly, the possibility of using all resources in the long run allows you to more actively influence price changes (therefore, for each individual firm, and consequently, the industry in In general, the supply curve will be more elastic. Second, the ability of new firms to enter the industry and old firms to leave the industry allows the industry to respond to market price changes to a greater extent than is possible in the short run. Consequently, output will increase or decrease by a greater amount in the long run than in the short run in response to an increase or decrease in price. In addition, the industry's long-term supply price floor is higher than the short-term supply price floor because all costs are variable and must be recovered.

In this chapter, we will talk about how the market can influence the behavior of a firm, or, conversely, how much power a firm can have over the market. The interaction of the firm and the market depends to a decisive extent on the structure of the market or the types of market structure.

By "market structure" is meant the nature of firms' competition and the presence of monopoly power, as well as the degree of their influence on firms' decisions.
The main questions of the lecture:
Types of market structures.
characteristics of a perfectly competitive market.
performance of a competitive firm in the short run.
Equilibrium of firm and industry in the long run.
Perfect competition and economic efficiency.
10.1. Types of Market Structures
One of the most important factors dictating general terms and Conditions the functioning of markets is the degree of development of competitive relations on it. market competition called the struggle for the limited demand of the consumer, conducted between firms in the parts of the market accessible to them.
The division of market structures into different types is based on a number of parameters that determine the characteristics of the industry market. These are: 1) the number of sellers and their market shares, 2) the degree of product differentiation, 3) the conditions for entering and exiting the industry, 4) the degree of producers' control over prices, 5) the nature of the behavior of firms. Depending on the content of each feature and their combination, various types of industry markets are formed, characterized by varying degrees of competitiveness.
In economic science, the following types of market structures are distinguished.
Perfect competition is a type of competition in which firms do not have market power and compete on price. Its characteristic feature is that sellers cannot increase their income by raising prices and the only way available to them to obtain economic profit
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is to reduce production costs, and perfect competition becomes a condition for ensuring maximum efficiency the functioning of the economy.
Imperfect competition is a type of economy in which firms have market power and compete for sales. This type of competition is a way of competing between firms with different sizes and costs, different product characteristics, different goals, and different competitive strategies. Him distinctive feature is the use of predominantly non-price methods of competition. Meet different kinds imperfect competition:
Pure monopoly. A market is considered absolutely monopoly if there is only one producer of a product on it, and there are no close substitutes for this product in other industries.

Therefore, under pure monopoly, the boundaries of the industry and the boundaries of the firm coincide.
Monopolistic competition. This market structure bears some resemblance to perfect competition, except that the industry produces similar but not identical products. Product differentiation gives firms an element of monopoly power over the market.
Monopsony. A situation in a market where there is only one buyer. The monopsonic power of the buyer leads to the fact that he is the creator of the price.
A monopoly that practices discrimination. This is usually understood as the practice of companies, which consists in assigning to one product different prices for different buyers.
Bilateral monopoly. A market in which one buyer, who has no competitors, is opposed by one seller - a monopolist.
Duopoly. A market structure in which only two firms operate. A special case of oligopoly.
Oligopoly. A market situation in which a small number of large firms produce the bulk of the output of an entire industry. In such a market, firms are aware of the interdependence of their sales, production volumes, investments and promotional activities.
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10.2. Characteristics of a perfectly competitive market
For perfect competition to exist, the following conditions must be met.
A large number of relatively small producers and buyers. At the same time, 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.
Absolute mobility of material, financial, labor and other factors of production in the long run. This means that resources are completely mobile and move seamlessly from one activity to another. The absence of barriers means absolute flexibility and adaptability of the perfectly competitive market.
Full awareness of all competitors about market conditions. 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.
Absolute homogeneity of the goods of the same name. Because the firms' products are indistinguishable, no buyer is willing to pay any firm more than he would pay its competitors. If one of the sellers raises the price, then buyers instantly leave him and buy goods from his competitors. Since the prices are the same, buyers do not care which company's products to buy.
No participant in free competition can influence the decisions made by other participants. Since the number of market entities is very large, the contribution of each producer to the total output is negligible, as well as the demand of an individual consumer. This means that each of them individually is not able to influence the price of the goods. They form the market price only by joint actions.
Thus, in a perfectly competitive model, the market price is the independent variable, and the firm under these conditions is often referred to as the price taker. Its choice is reduced only to making a decision on the amount of output.
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Under perfect competition, the demand curve for a firm's product will look like a horizontal line. From an economic point of view, the price line, parallel to the x-axis, means the absolute elasticity of demand. The presence of perfectly elastic demand for the firm's product is called the criterion of perfect competition. As soon as this situation develops in the market, the firm begins to behave like (or almost like) a perfect competitor.
A direct consequence of the fulfillment of the criterion of perfect competition is that the average income at any volume of output is equal to the price of the good and that marginal income is always at the same level.
10.3. Activities of a competitive firm in the short run
Principal behavior of the firm. For
firm operating in the short run, there are three principal options for behavior: production for the sake of maximizing profits; production for the sake of minimizing losses; termination of production.
Profit maximization occurs when the price exceeds the value of the average total costs (P>ATCmin). The price (P) exceeds the minimum value of the average total costs (ATCmin), so it is fundamentally possible to make a profit.
The second option - minimization of losses - is implemented when the market price of the enterprise's products is greater than the minimum value of the average variable costs, but less than the minimum value of the average total costs, i.e.
(ATStsh > P > AVCmin). If the firm stops production (even temporarily), it will have to pay fixed costs without attracting any current income. This means that the losses will become equal to the full amount of fixed costs and will exceed the amount that they would have had if production had been maintained. That is why the company continues to produce products and suffers losses, only minimizing them.
In the event that the market price of products is below the minimum value of average variable costs (R 72
Indeed, this price not only does not cover all costs, it is not able to fully cover variable costs. That is, each unit produced, in addition to the inevitable loss in the amount of fixed costs, also adds the uncovered part of the variable costs associated with the release of this product. Under these conditions, the greater the production, the greater the losses.
Profit maximization and the MC = MR rule. The choice of a principled behavior is only the first step of a firm in optimizing its position in the market. The next step is to determine precisely the level of production that maximizes profits or (under less favorable conditions) minimizes losses. Note that the profit maximization rule MR = MC is valid not only for conditions of perfect competition, but also for other types of market.
Under perfect competition, marginal revenue equals the price of a good. Therefore, the rule MR = MC can be represented in another form:
P = MR = MS, or P = MS.
That is, in conditions of perfect competition, profit maximization is achieved at the volume of production corresponding to the point of equality of marginal cost and price.
10.4. Equilibrium of firm and industry in the long run
Entry into and exit from a perfectly competitive market is open to all firms without exception. Therefore, in the long run, the level of profitability becomes the regulator of the resources used in the industry. If the market price level established in the industry is above the minimum average cost, then the possibility of obtaining economic profits will serve as an incentive for new firms to enter the industry. The absence of barriers on their way will lead to the fact that an increasing share of resources will be directed to the production of this type of goods. Conversely, economic losses will act as a disincentive that scares off entrepreneurs and reduces the amount of resources used in the industry.
The relationship between the level of profitability in a competitive industry and the size of the use of resources in it, and hence
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volume of supply, predetermines the break-even of firms operating in a competitive industry in the long run (or their receipt of zero economic profit).
Let a competitive industry initially have an equilibrium that dictates a certain price level at which the firm earns zero profit in the short run. Assume that there is an unexpected increase in demand for the products of an industry. In this situation, the industry demand curve will shift to the right, and a new short-term equilibrium will be established in the industry. For the firm, the new higher price level will be a source of economic profit. Economic profits will attract new producers to the industry. The consequence of this will be the formation of a new supply curve, shifted compared to the original to the right. A new, slightly lower price level will also be established. If economic profits are maintained at this price level, then the influx of new firms will continue, and the supply curve will shift further to the right. In parallel with the influx of new firms into the industry, the supply in the industry will also increase under the influence of the expansion of production capacities by firms already operating in the industry. Obviously, both of these processes will continue until the supply curve takes a position that means zero profits for firms. And only then will the influx of new firms dry up - there will no longer be an incentive for it.
The same chain of consequences (but in the opposite direction) unfolds in the event of economic losses: reduction in demand; price drop; the emergence of economic losses for firms; the outflow of firms and resources from the industry; reduction in long-term market supply; price increase; break-even recovery; stopping the outflow of firms and resources from the industry.
Thus, perfect competition has a peculiar mechanism of self-regulation. Its essence lies in the fact that the industry responds flexibly to changes in demand. It attracts an amount of resources that increases or decreases the supply just enough to compensate for the change in demand. And on this basis, it ensures the long-term break-even of firms.
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Summing up, we can say that the equilibrium established in the industry in the long run satisfies three conditions:
the conditions of short-term equilibrium are satisfied, i.e. short-term marginal cost is equal to short-term marginal revenue and price (P = MR = MC);
each of the firms is satisfied with the volume of used production capacities (short-term average total costs are equal to the least possible long-term average costs (ATC = LATC);
min min
the firm earns zero economic profit, i.e. there is no excess profit, and therefore there are no firms willing to enter or leave the industry (P = ATCmin).
All three of these long-run equilibrium conditions can be summarized as follows:
P=MR=MC=ATC. =LATC.
min min
10.5. Perfect competition and economic efficiency
Analyzing the above condition of long-term equilibrium, we can distinguish the following positive features of the market of perfect competition:
1. Production under conditions of perfect competition is organized in the most technologically efficient way. This is determined by the fact that the equilibrium is established at the level of the long-term and short-term minimum of average costs.
1. The firm and industry operate without surpluses and deficits. Indeed, the demand curve under perfect competition coincides with the marginal revenue curve (D = MR), and the supply curve coincides with the marginal cost curve (S = MC). Therefore, the condition of long-term equilibrium in a competitive industry is actually equivalent to the identity of supply and demand for a given product (since MR = MC, then D = S). Therefore, we can say that perfect competition leads to the optimal distribution of resources: the industry involves them in production exactly to the extent necessary to cover effective demand.
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2. Break-even of firms in the long run (P = LATC .). This, on the one hand, guarantees stability to the industry - firms do not incur losses. On the other hand, there are no economic profits, i.e. incomes are not redistributed in favor of this industry from other sectors of the economy.
The combination of these advantages makes perfect competition one of the most effective types of market. Strictly speaking, when we talk about self-regulation of the market, which automatically brings the economy to a state of optimum, we are talking about perfect competition.
However, perfect competition is not without its drawbacks:
Small businesses typical of this type of market are often unable to use the most efficient technique. The fact is that economies of scale are often available only to large firms.
A perfectly competitive market does not encourage scientific and technical progress. Small firms usually there is not enough money to finance long and expensive research and development work.
Thus, for all its merits, the market of perfect competition should not be an object of idealization. The small size of companies operating in a perfectly competitive market makes it difficult for them to operate in a modern world full of large-scale technology and permeated with innovative processes.
Keywords and concepts
Perfect competition, imperfect competition, monopolistic competition, oligopoly, monopoly, duopoly, monopsony, demand curve for the products of a competitive firm, position of long-term equilibrium.
Questions for self-examination and review
List the criteria for a perfectly competitive market.
Why is the demand curve for the product of a competitive firm a horizontal line, while the demand curve for the entire competitive market has a negative slope?
What are the principal options for the firm's behavior in the short and long run?
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What are the ways to reach the break-even point for enterprises?
Firms that produce at a loss must immediately close. Is this always true?
Under what conditions does a competitive firm reach equilibrium?
Explain whether competitive firms can develop if they earn zero profits in the long run?
What role does the absence of barriers in a perfectly competitive market play in establishing zero economic profit in the long run?
Explain at what level of output a competitive firm will achieve optimal scale in the long run?
Is perfect competition the most efficient type of market?
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The long-term period is understood as such a period of time when the firm changes the volumes of all the factors of production used.

Perfect competition implies the presence of a large number of firms, many buyers and sellers, the absence of price discrimination, when producers and buyers adapt to existing prices and act as price takers.

In its pure form, perfect competition is very rare.

Equilibrium position of a competitive firm in the long run (graph).

Under conditions of perfect competition in the long run, the following equality holds: MR=MC=AC=P (MR is marginal revenue; MC is marginal cost; AC is average total cost; P is price).

Perfect competition will help to allocate limited resources in such a way as to achieve maximum satisfaction of demand. This is provided under the condition that P=MS. This provision means that firms will produce the maximum possible amount of output until the marginal cost of the resource is equal to the price for which it was bought. This achieves not only high efficiency distribution of resources, but also maximum production efficiency. Perfect competition forces firms to produce products at the lowest average cost and sell it at a price corresponding to this cost. Graphically, this means that the average cost curve only touches the demand curve.

In the long run, firms have plenty of time to adjust in the best possible way to various market changes: whether to increase or decrease production, enter or leave an industry, and so on.

Three conditions for the equilibrium of the industry in the long run:

1) operating firms make the most efficient use of available capital equipment. This means that each firm in the industry in all short-term periods, which together form the long-term period, maximize profits by producing such a volume of output when MC = P

2) there are no incentives for firms in other industries to enter this industry. In other words, all firms in the industry have an output corresponding to the minimum of average total costs in each short run, and receive zero profit.

3) firms in the industry do not have the opportunity to reduce total costs per unit of output and make a profit by expanding the scale of production. This is equivalent to the condition under which each firm in the industry produces a volume of output corresponding to the minimum of average total costs in the long run.