Perfect competition. Types of Market Structures: Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly Advantages of Perfect Competition

A market economy is a complex and dynamic system, with many connections between sellers, buyers and other participants in business relationships. Therefore, markets by definition cannot be homogeneous. They differ in a number of parameters: the number and size of firms operating in the market, the degree of their influence on the price, the type of goods offered, and much more. These characteristics determine types of market structures or otherwise market models. Today it is customary to distinguish four main types of market structures: pure or perfect competition, monopolistic competition, oligopoly and pure (absolute) monopoly. Let's look at them in more detail.

Concept and types of market structures

Market structure– a combination of characteristic industry characteristics of market organization. Each type of market structure has a number of characteristic features that affect how the price level is formed, how sellers interact in the market, etc. In addition, types of market structures have varying degrees of competition.

Key characteristics of types of market structures:

• number of sellers in the industry;
• firm size;
• number of buyers in the industry;
• type of product;
• barriers to entry into the industry;
• availability of market information (price level, demand);
• the ability of an individual firm to influence the market price.

The most important characteristic of the type of market structure is level of competition, that is, the ability of an individual selling company to influence the overall market conditions. The more competitive the market, the lower this opportunity. Competition itself can be both price (price changes) and non-price (changes in the quality of goods, design, service, advertising).

You can select 4 Main Types of Market Structures or market models, which are presented below in descending order of level of competition:

• perfect (pure) competition;
• monopolistic competition;
• oligopoly;
• pure (absolute) monopoly.

A table with a comparative analysis of the main types of market structures is shown below.

Table of main types of market structures

Perfect (pure, free) competition

Perfectly competitive market (English "perfect competition") – characterized by the presence of many sellers offering a homogeneous product, with free pricing.

That is, there are many companies on the market offering homogeneous products, and each selling company, by itself, cannot influence the market price of these products.

In practice, and even on the scale of the entire national economy, perfect competition is extremely rare. In the 19th century it was typical for developed countries, but in our time only agricultural markets, stock exchanges or the international currency market (Forex) can be classified as perfectly competitive markets (and then with a reservation). In such markets, fairly homogeneous goods are sold and bought (currency, stocks, bonds, grain), and there are a lot of sellers.

Features or conditions of perfect competition:

• number of selling companies in the industry: large;
• size of selling companies: small;
• product: homogeneous, standard;
• price control: absent;
• barriers to entry into the industry: practically absent;
• methods of competition: only non-price competition.

Monopolistic competition

Market of monopolistic competition (English "monopolistic competition") – characterized by a large number of sellers offering a variety of (differentiated) products.

In conditions of monopolistic competition, entry into the market is fairly free; there are barriers, but they are relatively easy to overcome. For example, in order to enter the market, a company may need to obtain a special license, patent, etc. The control of selling firms over firms is limited. Demand for goods is highly elastic.

An example of monopolistic competition is the cosmetics market. For example, if consumers prefer Avon cosmetics, they are willing to pay more for them than for similar cosmetics from other companies. But if the price difference is too large, consumers will still switch to cheaper analogues, for example, Oriflame.

Monopolistic competition includes the food and light industry markets, the market of medicines, clothing, footwear, and perfumes. Products in such markets are differentiated - the same product (for example, a multicooker) from different sellers (manufacturers) can have many differences. Differences can manifest themselves not only in quality (reliability, design, number of functions, etc.), but also in service: availability of warranty repairs, free delivery, technical support, installment payment.

Features or features of monopolistic competition:

• number of sellers in the industry: large;
• firm size: small or medium;
• number of buyers: large;
• product: differentiated;
• price control: limited;
• access to market information: free;
• barriers to entry into the industry: low;
• methods of competition: mainly non-price competition, and limited price competition.

Oligopoly

Oligopoly market (English "oligopoly") - characterized by the presence on the market of a small number of large sellers, whose goods can be either homogeneous or differentiated.

Entry into an oligopolistic market is difficult and entry barriers are very high. Individual companies have limited control over prices. Examples of oligopoly include the automobile market, markets for cellular communications, household appliances, and metals.

The peculiarity of oligopoly is that the decisions of companies on prices for goods and the volume of its supply are interdependent. The market situation strongly depends on how companies react when one of the market participants changes the price of their products. Possible two types of reaction: 1) follow reaction– other oligopolists agree with the new price and set prices for their goods at the same level (follow the initiator of the price change); 2) reaction of ignoring– other oligopolists ignore price changes by the initiating firm and maintain the same price level for their products. Thus, an oligopoly market is characterized by a broken demand curve.

Features or oligopoly conditions:

• number of sellers in the industry: small;
• firm size: large;
• number of buyers: large;
• product: homogeneous or differentiated;
• price control: significant;
• access to market information: difficult;
• barriers to entry into the industry: high;
• methods of competition: non-price competition, very limited price competition.

Pure (absolute) monopoly

Pure monopoly market (English "monopoly") – characterized by the presence on the market of one single seller of a unique (without close substitutes) product.

Absolute or pure monopoly is the exact opposite of perfect competition. A monopoly is a market with one seller. There is no competition. The monopolist has full market power: it sets and controls prices, decides what volume of goods to offer to the market. In a monopoly, the industry is essentially represented by just one firm. Barriers to entry into the market (both artificial and natural) are almost insurmountable.

The legislation of many countries (including Russia) combats monopolistic activities and unfair competition (collusion between firms in setting prices).

A pure monopoly, especially on a national scale, is a very, very rare phenomenon. Examples include small settlements (villages, towns, small cities), where there is only one store, one owner of public transport, one railway, one airport. Or a natural monopoly.

Special varieties or types of monopoly:

• natural monopoly– a product in an industry can be produced by one firm at lower costs than if many firms were involved in its production (example: public utilities);
• monopsony– there is only one buyer in the market (monopoly on the demand side);
• bilateral monopoly– one seller, one buyer;
• duopoly– there are two independent sellers in the industry (this market model was first proposed by A.O. Cournot).

Features or monopoly conditions:

• number of sellers in the industry: one (or two, if we are talking about a duopoly);
• firm size: variable (usually large);
• number of buyers: different (there can be either many or a single buyer in the case of a bilateral monopoly);
• product: unique (has no substitutes);
• price control: complete;
• access to market information: blocked;
• Barriers to entry into the industry: almost insurmountable;
• methods of competition: absent as unnecessary (the only thing is that the company can work on quality to maintain its image).

Galyautdinov R.R.

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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 processes, in particular pricing.

With this model, competition between sellers reaches its peak. Due to the fact that market participants have virtually no influence on sales conditions, the economy is resistant to the emergence of negative processes such as unemployment and inflation.

Perfect competition has the following characteristics:

• a large number of buyers and sellers, including representatives of small and medium-sized businesses;
• sellers and manufacturers offer homogeneous goods;
• easy entry into the market even for small companies, no barriers from the state;
• high awareness of all market participants about the state of affairs in it, processes, subjects, etc., information can be obtained by everyone without problems and restrictions;
• sellers and buyers cannot influence the terms of trade and 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 to create appropriate conditions through the formation of a regulatory framework.

Advantages of perfect competition

The pursuit of perfect competition allows us to achieve high efficiency of a market economy. Despite the fact that many people call this model ideal, it has both undeniable advantages and some disadvantages.

Advantages of perfect competition:

• market self-regulation;
• no shortage of goods;
• efficient resource allocation;
• high production efficiency;
• no inflated prices;
• equality of opportunity for market participants;
• freedom to develop entrepreneurship;
• the state does not interfere in market processes;
• Both buyers and sellers win here.

Disadvantages of Perfect Competition

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

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

Almost all the disadvantages 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 and marketing campaigns in its own way, distributes resources, and 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 beat competitors.

To achieve economic efficiency, it is first necessary to achieve efficiency in production and resource allocation. 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. Minimum costs, efficient distribution of resources, absence of shortages, self-regulation of processes - compliance with all these conditions is impossible 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.

Perfect competition exists in areas of activity where there are quite a lot of small sellers and buyers of the same product and therefore none of them is able to influence the price of the product. The price is determined by the free play of supply and demand in accordance with the market laws of their functioning.

Main characteristics of a perfectly competitive market:

1) a large number of small sellers and buyers;

2) the product being sold is uniform from all manufacturers, and the buyer can choose any seller of the product to make a purchase;

3) the inability to control the price and volume of purchase and sale creates conditions for constant fluctuations of these values ​​under the influence of changes in market conditions;

4) complete freedom to “enter” the market and “leave” the market.

In reality, a perfectly competitive market does not exist.

In conditions of pure competition, the size of the firm's share in the volume of output and sales of goods does not exceed 1%.

Figure 1 - Market demand (b) and demand for the company’s products under conditions of perfect competition (a)

All firms in the industry are small in size and produce homogeneous products. Each of them is guided by the market price, which is beyond the control of the individual company.

An individual firm's demand curve is perfectly elastic and revenue equals price.

Maximizing a company's profit in the short term

Figure 2 – Maximizing a company's profit in the short term.

Marginal Revenue (МR) is the amount by which total income will change when the volume of output changes per unit of output:

Total income– product of quantity and price:

Changes in marginal and average income are shown in Figure 3.

Figure 3 - Changes in marginal and average income.

To maximize profits, a firm must expand output until marginal revenue exceeds marginal cost. And it is worth stopping the increase in output as soon as the increasing marginal costs begin to exceed the marginal revenue (Fig. c). For the company, this means the production of “q *” units. products. The same result is obtained by comparing total costs and total income.

Minimizing short-term losses

Figure 4 – Minimizing losses of a competitive company in the short term.

If there is an unfavorable situation in the market: prices have fallen from level C to level D and there is no such level of output for the company to make a profit, then it is necessary to choose such a volume of production (q*) to minimize losses. In Figure 4, this is the point of intersection of the ascending part of the marginal cost curve with marginal revenue.

Long-run equilibrium of a firm under perfect competition

For a firm in a perfectly competitive market to be in long-run equilibrium, the following three conditions must be met.

1 The company should not have incentives to increase or decrease output volumes given the given size of the enterprise. This means that short-run marginal cost must equal short-run marginal revenue, i.e. the condition of short-term equilibrium is the condition of long-term equilibrium.

2 Each firm must be satisfied with the size of its existing enterprise.

3 There should be no incentive for new firms to enter the industry or old firms to exit.

Figure 5 – Long-term equilibrium of a firm under perfect competition.

The graph (Figure 5) shows a company for which all three conditions are met:

1) Short-run marginal cost equals price at quantity Q 1 . This volume provides the company with maximum profit

2) The size of the enterprise is such that average total costs precisely equal to the smallest possible long-term average costs.

3) Long-term average costs are equal to the price at the equilibrium volume of production Q 1. This guarantees the absence of motives that encourage firms to re-enter the market or leave the market.

PS: Costs consist of explicit and implicit. The latter include the opportunity cost of capital or "normal return".

When price equals average total cost, the firm earns zero economic profit.

If economic profit is 0, then this will attract new firms to the industry.

If economic profit is 0, then this will cause old firms to exit the industry.

All three conditions for long-term equilibrium can be summarized as follows:

Price = marginal cost = short-run average total cost = long-run average cost

P=MC=ATC k =ATC d

Monopoly

Monopoly- a situation where there is one seller, and he produces a product that has no close substitutes.

The following characteristic features of a monopoly are distinguished::

1) the only seller;

2) there are no close substitutes;

3) “dictating the price”;

4) the presence of barriers to entry into this industry.

Barriers to entry into the industry may be in following forms:

A) economies of scale(positive economies of scale can lead to a situation where having only one firm is the most efficient solution) - this natural monopolies;

b) ownership of patents and scientific research(it is impossible for other firms to enter the market until the patent expires);

V) ownership or control of highly sensitive raw materials;

G) unfair competition(a conspiracy of several firms to limit production volume and raise prices).

These barriers are significant in the short term, but may be surmountable in the long term. Barriers to entry into an industry can allow a monopolist to make economic profits even in the long term. Wherein:

a) the monopolist does not set the maximum possible price;

b) the maximum total profit rarely coincides with the maximum profit per unit of output;

c) high costs and weak demand may prevent the monopolist from making any profit at all;

D) the monopolist will tend to avoid the inelastic portion of its demand curve.

There are the following types of monopoly:

1 Closed monopoly– protected from competition through legal restrictions (patent protection, copyright)

2 Natural monopoly An industry in which long-run average costs are at a minimum only when one firm serves the entire market. These are monopolies based on economies of scale in production, or on the ownership of unique natural resources (Gazprom, RAO ES)

3 Open monopoly– the company becomes the sole supplier of any product, without having any special protection from competition. These are companies that have entered the market with new products for the first time. Their competitors will appear on the market later.

It is believed that under conditions of monopolization, one company accounts for 60-64% of sales.

PS: Monopsony- a market with many sellers and only one buyer. For example, an automobile company has monopsony power in the markets for tires, batteries, and other automobile parts.

Profit maximization

Figure 6 – Profit maximization by a monopolist

The market position of a pure monopolist differs from that of a competitive firm in that the monopolist's demand curve is downward sloping, so the marginal revenue curve will be below the demand curve.

Like a competitive seller, a pure monopolist will maximize profits by equalizing marginal revenue to marginal cost.

is a translation of the condition of equality of marginal revenue to marginal costs.

Rule of thumb for pricing represents the following: the excess of price over marginal cost is equal to the inverse of the elasticity of demand with a minus sign.

The monopolist charges a price that exceeds marginal cost by an amount inversely proportional to the elasticity of demand.

where MC = marginal cost,

E d – price elasticity of demand.

If demand is very elastic, then the price will be close to marginal cost and the monopolized market will be similar to the free competition market.

- index Lerner's monopoly power

For a perfectly competitive firm, P=MC, L=O.

The larger L, the greater the monopoly power. L varies from 0 to 1.

Let's consider society's losses from monopoly, presented in Figure 7.

Figure 7 – Society’s losses from monopoly

If the price were set at the level of point E 1 (the intersection of the MC curve and the demand curve), i.e. price P 1 would correspond to the conditions of perfect competition MC = P, then consumer surplus (consumer rent) would be equal to the area of ​​the triangle P 1 E 1 P 0.

In conditions of imperfect competition (monopoly), the price is set at the level of point E 2 (the intersection of MC and MR). At the same price P 2, the volume of supply of the company - Q 2 is less than the volume that would be under perfect competition (Q 2

The net loss for society is the triangle EE 1 E 2.

Thus, the monopoly, as it were, “tears into pieces” the consumer rent and the producer rent: part goes to the monopoly itself (shaded rectangle), the other part of the consumer rent (CE 1 E 2) is generally lost by society and does not go to anyone. Also, no one gets part of the producer's rent (ECE 1) - this is the destroyed wealth of society.

P. Samuelson and V. Nordhaus believe that the “dead loss” arising due to the monopolistic distribution of resources amounts to 0.5-2% of US GNP.

Various possible options for state regulation of natural monopolies:

1) The price is set equal to marginal costs (P=MC) - at the intersection of the demand curves and marginal costs, which represents "socially optimal" price;

2) The price is set equal to average costs (P = AC) - at the intersection of the demand curves and average costs, which represents a price that provides a “fair profit”;

MINISTRY OF EDUCATION AND SCIENCE OF THE RUSSIAN

FEDERATION

MOSCOW STATE UNIVERSITY

ECONOMICS, STATISTICS AND INFORMATION SCIENCE

Institute of World Economy and Finance

Course work

By subject :

"Microeconomics"

"Perfect Competition"

Completed by: student ZMM-11

Skorik V.O.

Scientific adviser:

Khasanov R.Kh.

Coursework due date:

Date of course work defense:

Astrakhan 2010

Introduction…………………………………………………… 3-4 pp.

1. Perfect competition

1.1Basic concepts of perfect competition……… 5-6pp.

1.2 The mechanism of supply and demand under conditions of perfect competition………………………………………………………...... 7-9 pp.

1.3 Equilibrium of a firm and an industry in a perfectly competitive market in the short run……………………………………………………… 10-12 pp.

1.4 Equilibrium of a firm and an industry in a perfectly competitive market.................................................... ............................................... 13-17 pages .

2. Conditions of perfect competition in Russia and the behavior of a company in a perfectly competitive market

2.1 World experience and the existence in Russia of conditions for perfect competition………………………………………………………………. 18-19 pp.

2.2 Studying the behavior of firms in conditions of perfect competition………………………………………………………. 20-23 pp.

Conclusion……………………………………………………. 24-25 pp.

List of used literature…………………………... 26 pages.

Introduction

The key concept that expresses the essence of market relations is the concept of competition (lat. concurrerre to collide, compete).
Competition is rivalry between participants in a market economy for the best conditions for the production, purchase and sale of goods. Such a clash is inevitable and is generated by objective conditions: the complete economic isolation of each market entity, its complete dependence on the economic situation and confrontation with other contenders for the greatest income. The struggle for economic survival and prosperity is the law of the market. Competition (as well as its opposite - monopoly) can only exist under a certain market state. Different types of competition (and monopolies) depend on certain indicators of market conditions.

The main indicators are:

· Number of firms (economic, industrial, trading enterprises with legal entity rights) supplying goods to the market;

· Freedom for an enterprise to enter and exit the market;

· Differentiation of goods (giving a certain type of product for the same purpose different individual characteristics - by brand, quality, color, etc.);

· Participation of firms in control over market price.

Historical experience shows that the market functions best in a competitive environment, when freely changing, flexible prices carry the most reliable information.

It is advisable to begin studying the work of the market, the situation in the market of consumers and producers from conditions that are not distorted by monopolism, free or pure competition, i.e. from the model of perfect competition.

The perfectly competitive market model serves as a benchmark for the efficiency of resource allocation and use. Perfect competition presupposes a level of economic organization at which society extracts maximum utility from available resources and technologies, and it is no longer possible to increase one’s share in obtaining the result without reducing another. Society is on the edge of usefulness of opportunity. Resources are allocated efficiently in both production and consumption. Firms participating in production produce a set of products that are most preferable and useful for the consumer, and production is carried out in such a way that costs for society become minimal.

Based on the above, the topic “Production and pricing under conditions of perfect competition” considered in this work is relevant.

The purpose of this work is to study pricing and production under conditions of perfect competition.
Job objectives:
1) Study the general characteristics of a perfectly competitive market.
2) Conduct an analysis of production and pricing under conditions of perfect competition.

1. Perfect competition

1.1 Basic concepts of perfect competition

Perfect, free or pure competition is an economic model, an idealized state of the market, when individual buyers and sellers cannot influence the price, but shape it through their input of supply and demand. In other words, this is a type of market structure where the market behavior of sellers and buyers is to adapt to the equilibrium state of market conditions.

Conditions of perfect competition:

· an infinite number of equal sellers and buyers

homogeneity and divisibility of products sold

· no barriers to entry or exit from the market

high mobility of production factors

· equal and full access of all participants to information (prices of goods)

The model of perfect competition is based on a number of assumptions about the organization of the market.

Product homogeneity means that all units are exactly the same in the minds of buyers and they have no way to recognize who exactly produced a particular unit. The products of different enterprises are completely interchangeable and their indifference curve has a straight shape for each buyer

The totality of all enterprises producing a homogeneous product forms an industry. An example of a homogeneous product would be the common stock of a particular corporation traded on a secondary stock market. Each of them is completely identical to any other, and the buyer does not care who exactly is selling this or that share if its price does not differ from the market one. The stock market, in which the shares of many corporations are traded, can be considered as a collection of many markets for such homogeneous goods. Standardized goods, usually sold on specialized commodity exchanges, are also homogeneous. These are, as a rule, various types of raw materials (cotton, coffee, wheat, certain types of oil) or semi-finished products (steel, gold, aluminum ingots, etc.).

Products are not homogeneous, although they are the same, the manufacturers (or suppliers) of which can be easily recognized by buyers by production or trade mark (aspirin, acetylsalicylic acid, york pain reliever), brand name or other characteristic features, if buyers give them, of course, significant value. Thus, the anonymity of sellers, together with the anonymity of buyers, makes a perfectly competitive market completely impersonal.

1.2 The mechanism of supply and demand under conditions of perfect competition

Market relations are always represented by the paired “seller-buyer” relationship. These relationships take the form of relationships between production and consumption. In the sphere of exchange, they manifest themselves as supply and demand.

Demand is the quantity of goods (services) that buyers can purchase on the market. The size of demand depends on many factors: prices of goods; prices of substitute goods; cash income of buyers; tastes and preferences of people; consumer expectations. Among these factors, the most significant are the prices of goods and the income of buyers. In this case, the determining factor is the price of the product.

Q D = f(P) – price demand function.

This function can be depicted as a graph (Fig. 1).

The indicated points on the demand curve DD show a specific combination of price and quantity of goods. This relationship is called the law of demand, which states that, other things being equal, when prices fall, the buyer purchases a larger volume of goods and reduces purchases when prices rise.

Demand factors influence the behavior of the DD demand curve in different ways. When price changes, demand either increases or decreases, moving along the DD curve. The influence of other factors on demand leads to a shift in the curve. Thus, a decrease in income of the population leads to a decrease in demand, as a result, the DD curve moves down to position D 1 D 1, and an increase in income leads to an increase in demand, and the DD curve moves up to position D 2 D 2 (Fig. 2).

Offer– this is the number of goods (services) that sellers can offer on the market. The size of the offer depends on the following factors: prices of goods; prices for substitute goods; availability of production resources; systems of taxes and subsidies for producers; number of sellers. In this case, the determining factor is the prices of the goods offered (Fig. 3).

Q S = f(P) – price supply function.

The indicated points on the supply curve SS show a specific combination of price and quantity of goods. This relationship is called the law of supply, which states: if other conditions remain unchanged, then when prices for a product rise, the seller increases production and supply of goods and reduces production and supply when they fall. Other factors change supply, which is characterized by a shift in the SS supply curve. Thus, when tax rates on producers increase, the supply of goods decreases, and the supply curve SS shifts to the left - to position S1S1. Providing subsidies leads to an increase in production and supply, and the SS curve shifts to the right - to the S2S2 position.

If demand is expressed through the quantity of goods offered for sale and through their price, we will obtain a demand curve that reflects a strictly defined relationship: the lower the price, the higher the demand. Market demand represents the total demand of all buyers of a given product at a given price (Fig. 4).

P0

A perfectly competitive firm takes the price of its products as given, independent of the volume of products it sells.

The product of a competitive firm's unit price and the volume of products sold represents gross income.

Let's say there are 10 thousand competing firms in the industry, each of which produces 100 units of product. The total supply is therefore 1 million units. Now suppose that one of these 10 thousand firms reduces its production to 50 units. Will this affect the price? No. And the reason is clear: a reduction in output by one firm has an almost imperceptible effect on total supply - more precisely, the total supply decreases from 1 million to 999,950 units. This is obviously not a sufficient change in aggregate supply to significantly affect the price of the product. But for any price that exceeds p 0 even by a small amount, the quantity demanded is 0. The firm will lose its customers if it tries to raise the price above p 0 . If a competitive firm sets a price lower than the market price, then all buyers will purchase goods only from this firm, and the amount of demand for the firm’s products will be equal to the amount of market demand at the set price. But such a price will never be set by a competitive firm, since this leads to its unprofitability. Thus, a competitive firm always sets the price for its product equal to the prevailing market price.

The data in columns (1) and (2) of Table 1.1 describe a perfectly elastic demand curve at a market price equal to $142. The firm is unable to achieve a higher price by limiting its output; Nor does it need a lower price to increase sales.

Table 1.1 - Demand for a firm’s product and its income under conditions of pure competition.

It is obvious that the demand curve for a firm's products is at the same time an income curve. What is designated in column (1) of Table 2.1 as the price per unit of product for the buyer is the proceeds from the sale of a unit of product, or the average income of the seller. Statement that the buyer must pay the price of $142. per unit of product, is identical to the following thesis: revenue per unit of product, or the average income received by the seller, is $142. Price and average income are the same thing, but from different points of view.

Gross income for any sales volume can be easily determined by multiplying the price by the corresponding quantity of output that the firm is able to sell (column (3)). In this case, gross income increases by a constant amount of $142. – from each additional unit of sales. Each item sold adds its price to gross income.

Whenever a firm plans any change in output, it is interested in how income will change as a result of this shift in output. What will be the additional income from selling one more unit of product? Marginal revenue is the change in gross income, that is, the additional income that results from the sale of one more unit of product. As shown in column (3) of Table 1.1, gross revenue is zero when zero units of a product are sold. The first unit sold increases gross income from zero to $142. Marginal revenue—the increase in gross income resulting from the sale of the first unit of product—is therefore $142. The second unit sold increases gross income from $142 to $284, so the marginal income is again $142. In column (4), marginal revenue is a constant value equal to $142, since it is by this constant value that gross income increases with each additional unit of product.

1.3 Equilibrium of a competitive firm in the short run.

A short-term period is a period during which the production capacity of each enterprise (firm) is fixed, and output can be changed by changing the volume of use of variable resources. The total number of enterprises in the industry remains unchanged. Let's assume that production volume is equal to sales volume.

The revenue of a competitive firm (TR) with a constant market price (p) is proportional to sales volume (Q):

TR=p*Q (1.1)

Two conclusions follow from this formula:

The average revenue (AR) of a competitive firm is equal to the market price of the product.

The marginal revenue (MR) of a competitive firm is also equal to the market price of the product.

From here we get the following relation:

AR=MR=p (1.2)

The company's profit is calculated using the formula:

P=TR-TC (1.3);

Where: TC - costs

If the profit is negative, then the excess of costs over revenue is called losses. The magnitude of the losses is positive.

Equilibrium output is the volume of production at which the firm's profit is maximized. In a firm's equilibrium state, marginal revenue equals marginal cost and the market price of the product:

MR=MC=p (1.4)

In Fig. 1.3 (a), the revenue curve of a competitive firm is depicted as a straight line passing through the origin. Its slope is determined by the price of the product. The total cost curve intersects the revenue curve at points Q 1 and Q 2. At these production volumes, the firm's profit is equal to 0. If output is less than Q 1 or more than Q 2, then costs are greater than revenue and the firm's profit is negative (Fig. 1.3 (b)).

Q 1 Q * Q 2

Figure 1.3 - Equilibrium of a competitive firm in the short run

If the firm's output lies in the range from Q 1 to Q 2, then the revenue curve is located above the cost curve, and the firm's profit is positive. For each output from this interval, the profit is equal to the length of the vertical segment connecting the corresponding points of the revenue curve and the cost curve. In Fig. 1.3 (a), these segments form a figure that resembles a fish, and the maximum profit is equal to the thickest section of this “fish”. Maximum profit is achieved when the tangent to the graph of total costs is parallel to the graph of the revenue function, that is, marginal costs are equal to the price of the product. In Fig. 1.3, the equilibrium output is denoted by Q *.

If the firm's output is less than the equilibrium value Q *, then the tangent to the total cost curve has a smaller slope to the x-axis than the revenue curve, that is, marginal costs are less than the price of the product. In this case, a unit increase in output increases the firm's profit. If output is greater than the equilibrium value, marginal costs are greater than the price of the product and it is advisable to reduce output.

Figure 1.3 (c) shows that the equilibrium output of a competitive firm corresponds to the point of intersection of the graph of the constant marginal revenue function and the graph of the marginal cost function (the case is depicted when marginal costs increase for any output).

1.4 Supply of a competitive firm in the short run.

We use the equilibrium condition of a competitive firm obtained above to clarify the economic essence of its individual supply curve in the short term. First, we determine at what price of the product it is advisable for a competitive firm to stop production. Consider an unprofitable company. In the short term, it has two options: continue production with minimal losses or stop production.

If production continues, the firm's losses will be equal to the difference between total costs and revenue:

TC – pQ (1.5)

where Q is the equilibrium production volume.

If production ceases, the firm's revenue is zero, and its losses are equal to total costs, which, at zero output, are equal to fixed costs FC. The company will stop production if the costs in the first case are greater than the costs in the second case, that is:

TC – pQ > FC (1.6)

hence p< AVC , где AVC – средние переменные издержки.

Thus, it is advisable for an unprofitable competitive firm to stop production when the market price of the product falls below the minimum value of average variable costs. In other words, the minimum individual supply price of a competitive firm is equal to the minimum average variable cost.

Let us now consider the question of the shape of the individual supply curve of a competitive firm. From the equilibrium condition it follows that at each price p (greater than the minimum average variable costs), a competitive firm will produce and offer a volume of products S, which will ensure equality of marginal costs and this price, that is:

p = MC(S) (1.7)

Thus, the marginal cost function establishes a one-to-one correspondence between the price of a product and the quantity supplied.

Thus, the supply curve of a competitive firm represents the branch of the marginal cost curve that lies above the minimum of average variable costs. The supply curve of a competitive firm is shown in Figure 1.4. When releasing Q 1, a minimum of average variable costs equal to p 1 is achieved, and when releasing Q 2, a minimum of average costs equal to p 2 is achieved.

If the market price of the product is less than p 1, then the firm stops production, and its supply is zero. If the market price of the product lies in the range from p 1 to p 2, then the firm continues production, but incurs losses. If the price of the product is greater than p 2, then the firm makes a profit.

1.5 Supply of a competitive firm in the long run.

The long-run period is the period during which production capacity can be adjusted to conditions of demand and costs. If operating conditions are unfavorable for the company, then it may leave the market (industry). On the other hand, new firms can enter the market (industry) if conditions are favorable. Thus, the number of firms in an industry is variable in the long run.

Perfect competition presupposes equal access of all firms to resources, including technological information. Therefore, in the long run, each firm can choose and implement the most efficient production option, as a result of which the total cost curves of all firms in the same industry will be identical, and we can say that in the long run, the industry consists of identical, or typical, firms.

WITH
Over time, in a perfectly competitive market, the price of a product tends to the minimum long-term average cost (Fig. 1.5).

Firstly, the price cannot fall below the minimum long-term average cost for a long time (price p 1 in Fig. 1.5), since in such a situation the company is unprofitable. This follows from the formula that specifies the firm’s profit in the long run:

П=Q(p – AC) (1.8)

Where: Q – release;

p – product price;

LRAC – long-term average cost.

Secondly, the price cannot exceed the minimum long-term average cost for a long time (price p 2 in Fig. 1.5), since in this situation the firm’s profit is positive. Positive profits attract new firms to the industry, which will increase market supply and reduce market price. The price will decline until it again reaches the minimum long-run average cost.

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