Equilibrium of the firm in the short run. Long-term equilibrium of the firm and the industry. consider the equilibrium of the firm in the short and long run

Lesson 13 The relationship between inflation and unemployment in the short and long term Seminar Teaching laboratory: discussing, answering, discussing ... Discussing1. The concept and characteristics of inflation. 2. Concepts and types of inflation. 3. The relationship between inflation and

2. Equilibrium of the firm in the long run The long-term period and the processes taking place in it were described in the works of economics school... It is characterized by the state of full employment of all resources and factors of production. Besides,

The main task of the company, striving to produce products with minimal costs in the long run, is to find the appropriate capital-labor ratio. Its value simultaneously depends on the technology, represented by the production function, and on the economic environment, represented by the prices of factors of production. The area of ​​choice, determined by technology, is clearly represented by a map of isoquants, and the area of ​​choice, depending on the economic situation, is a line of equal costs, or isocost, shown in Fig. 2.19. Her equation is derived from the equality of the amount of money spent

Rice. 2.19.

Rice. 2.20.

firm for the production of goods M, the amount of expenses for payment of labor and capital services:

Each dot of the isocosta shows how a given amount of money can be distributed between payment for services of labor and capital. The slope of the isocosta () is equal to the ratio of the prices of the factors of production, and its distance from the origin is determined by the sum of expenses.

Having drawn the isocosta on the isoquant map, we will combine the technological and financial capabilities of the company. The point of contact of the isocost with one of the isoquants (in Fig. 2.20, the point H) indicates the combination of the amount of labor and capital that provides the maximum possible release for a given amount of costs or minimum costs for a given release. In the case shown in Fig. 2.20, the firm, using units of labor and units of capital, will produce 160 units. products with minimal costs.

The state in which a firm produces products with minimal average costs over a long period is called equilibrium of the producer.

At the point of tangency between the isoquant and the isocost, both lines have the same slope. As we already know, the slope of the isoquant is determined by the marginal rate of technical replacement of capital by labor, and the slope of the isocost is determined by the ratio of prices of factors of production. Consequently, the condition for the equilibrium of the firm is equality: Since, in a long period, products are produced with minimal costs, if the ratio of the marginal productivity of the factors of production is equal to the ratio of their prices:

Equality (2.7) is a kind of equality (2.4) and determines the behavior of a competitive firm in the long run. If the ratio of the prices of factors of production does not change, then the firm produces any volume of output at the same capital-labor ratio, i.e. by changing the scale of production. A change in the relative prices of factors of production leads to a change in the capital-labor ratio. So, if in the situation shown in Fig. 2.20, the price of labor decreases or the price of capital rises, then the slope of the isocost to the abscissa will decrease and the firm will produce 160 units. products when combined. Note that the transition from the point H exactly F accompanied by a decrease in labor productivity: the same amount of products is produced with high labor costs. Nevertheless, the combination provides a minimum production cost of 160 units. products in new system prices of factors of production.

In the early 1990s. Fortune magazine published data from which it followed that in Japanese company On average, Honda takes 10.9 hours of labor to make a Civic car, while the American company Ford uses 16 hours of labor for a similar-class Escort car. After reviewing this data, Japan's labor minister called American automakers lazy and unproductive. The shareholders of the American company became worried, and there was a threat of a "dump" of shares. But the managers reassured their shareholders by pointing out an article in Automotive News that documented that the average wage rate for American workers in the industry was about $ 16 an hour, while for Japanese workers it was US $ 18

Equilibrium condition

In market theory short-term called period when the number of firms in the industry and the size of each firm are fixed, but firms can change output by changing the number of variables, in particular labor.

The goal of the firm is to maximize profits. (P) is the difference between revenue () and total costs of the firm ():

P = TR - TS.

Both the revenue and the costs of the firm are network output functions (). Since in the revenue function ( TR = P * q) the market price is beyond the control of a completely competitive firm, the task of the latter is to determine the output at which its profit will be maximized.

The firm maximizes profit on such an output when it becomes equal to the marginal cost:

MR = MC.

Equality MR =MC as a condition for maximizing profit can be justified logically. Each additional unit of output brings the firm some additional revenue (marginal revenue), but also requires additional costs (marginal cost). If the marginal income exceeds the marginal cost for a certain volume of output, then the firm makes more profit, producing one more unit of output. Conversely, if the marginal revenue for a given output is below marginal cost, the firm can increase profits by decreasing output by one unit. If, finally, the marginal income coincides with the marginal cost, then no change in production can increase the profit - the achieved output is optimal. The firm is in a state of equilibrium - it does not need to increase or decrease its output to obtain maximum profit.

Since the marginal income of a perfectly competitive firm is equal to the price of the good, the above equality takes the form:

P = MC.

If the function of the total (variable) costs of a firm is continuous and differentiable, then to find the equilibrium output of a perfectly competitive firm, one must first find the marginal cost function (taking the derivative of the function of total or variable costs of output), and then equate it to the price of the good.

How a firm maximizes profits

Consider at conditional example how a competitive firm reaches an equilibrium point. Let there be given constants and variable costs firm, as well as the price at which it sells its goods. On this basis, it is possible to calculate the changes in average and marginal costs, revenues and profits of a firm depending on changes in its output (Table 10.2).

Table 10.2. Maximizing the profit of a competitive firm

In this case, marginal costs first decrease and then increase, i.e. we are faced with complicated cost functions (topic 9, item 9.4).

Suppose a firm accidentally stops producing 5 units. The marginal income from the release of one more unit of output (aka the foam of the product) is 30, while the marginal cost is only 18. Therefore, the firm increases output, and its profit increases by 12 (from 8 to 20). Let the firm first choose the release of 9 units. In this case, the marginal income is, as always, 30, and the marginal costs are 40. The excess of marginal costs over the marginal income is a signal to reduce production to 8 units, which increases profit by 10 (from 16 to 26). Finally, when producing 8 units. product marginal income coincides with the marginal cost (30 = 30), and the profit is maximum (26). It is on this issue that our company stops.

The attentive reader may argue that in the given example, exactly the same profit is obtained with the release of 7 units. goods. The point, however, is that our calculation of marginal costs is only an approximation. Exactly marginal costs are calculated as the increment in total (variable) costs with very little change in output. Imagine that in the production of 7.99 units. of the commodity, the marginal revenue is still slightly higher than the marginal cost. This means that it is profitable to produce 0.01 more goods, after which the marginal income and marginal costs become equal. In other words, it uses the premise that the product is infinitely divisible: it is possible to produce another gram of oil, another nail, or another car if they are produced in thousands.

The equilibrium point and other critical points of a perfectly competitive firm can be shown by connecting in the figure the marginal revenue (price) functions, as well as the marginal, average variables and average total costs (Figure 10.3).

Rice. 10.3. Equilibrium of a perfectly competitive firm

As long as production rises from zero to, each subsequent unit of output increases the firm's losses, since in this interval the marginal costs exceed the marginal income (Figure 10.3b). Accordingly, when issuing, losses reach their maximum. In fig. 10.3a, we see that upon release TS and TR maximum - total costs exceed the firm's revenue by the maximum possible amount.

The firm continues to increase output and moves into a zone where marginal revenue is higher than marginal cost (MR> MC in Figure 10.3b). In this zone additional units of issue start to make a profit. Nevertheless, due to the burden of past losses, the total profit remains negative until output is reached, at which the decreasing average total costs (total costs per unit of output) become equal to the price. At this point called break-even point, profit (loss) is equal to zero. In fig. 10.3a the breakeven point is the point where revenue equals total costs.

Having passed the break-even point, the firm leaves the loss-making zone and moves into the profitability zone, since after the release, the average total costs in Fig. 10.3b are below the price. At the same time, when producing, the average total costs are minimal, i.e. the difference between price and average total costs is greatest. The latter means that upon release the maximum profit per unit of production.

The firm, however, continues to ramp up production as its goal is to maximize overall profits. This is achieved at output when the marginal revenue in Figure 10.3b equals marginal cost. The firm's revenue (TR = P * q) at this point is equal to the area , and total costs (ТС = AC х q) are areas. Thus, the maximum profit of the firm (P = TR-TS) is the area.

At release, the profit is maximum and in Fig. 10.3a, since for this release the distance between the revenue and total cost functions becomes maximum - revenue exceeds costs by the maximum possible amount.

If the output is surpassed, the profit will begin to decrease, since the marginal costs in fig. 10.3b will exceed the marginal revenue. Nevertheless, profits will remain positive until output, at which the increasing average total costs reach the price level. We have a second breakeven point, beyond which the loss zone begins.

In fig. 10.3a the second break-even point, achieved with the same volume of output (), is the point where revenue again becomes equal to total costs.

How a firm minimizes losses

Consider a very important situation. Let the cost data remain the same as used in table. 10.2, but suppose that the price of the product in question for some reason has dropped from 30 to 24, i.e. below the minimum average total cost. As a result, the firm begins to incur losses for any issue (Table 10.3).

Table 10.3. Minimizing the loss of a competitive firm

In this case, the firm still chooses the output (7 units), in which the marginal income is equal to the marginal cost, since with such production the losses are minimal (16); profit maximization means in this case minimization of losses. The company faces, however, the question: to close or continue production, despite the losses.

To answer this question, you need to recall the theory of fixed and variable costs (topic 9, p. 9.3). Recall that fixed costs are costs that do not change with changes in output; the firm bears these costs for any output, including zero. Variable costs, on the other hand, are zero at zero output, and then they increase with production.

The division of costs into fixed and variable costs refers to the short-term period. This is due to the fact that in the short term, some costs are given and cannot be changed. These usually include depreciation of fixed assets (machines, machinery, equipment, buildings, etc.), rent, interest on a loan, etc. For example, if a lease is concluded or a loan is taken out, then the same rent and interest must be paid regardless of whether the company is operating at full capacity or has stopped its activities altogether. On the other hand, variable costs are usually raw material costs, wages, electricity, etc. - change in a short period along with a change in production.

In the long run, there is no division of costs into fixed and variable costs; the variables here are all costs. In particular, after some time the company may renew the lease agreement, purchase new equipment or sell old equipment, take a new loan.

Keeping all this in mind, we will try to answer the question whether our company should close or whether it is still better for it to continue working. In a short period, the firm will prefer to stay in business, because new price exceeds the minimum of average variable costs. The fact is that if it closes, it will save only on variable costs (they will become zero), but fixed costs will still have to be borne. In our example, fixed costs are equal to 60. This means that with zero output (the firm closed), the losses will be 60. Therefore, the firm continues production in a short period in order to reduce its losses, because with the release of 7 units. goods losses are equal to only 16. The situation is schematically shown in fig. 10.4.

Rice. 10.4. Costs and revenues of the firm with optimal output (the firm remains in the market)

In this case, revenue (168) fully covers variable costs (124) and partially - fixed costs (60). Therefore, the company remains on the market.

In the short run, the firm will close only if the price falls further and falls below the minimum of the average variable costs. The latter will mean that the firm's revenue will not cover not only total, but even variable costs (Figure 10.5).

Rice. 10.5. Costs and revenues of the firm with optimal output (the firm stops operations)

In such conditions, continuing production only increases losses, and the firm stops production.

In the long run, the firm can change any of its costs. For example, she may try to conclude a new lease on more favorable terms for herself, improve technological process, change the amount of capital used, etc. If all these measures do not lead to profit, the firm will have to permanently leave the industry.

All these considerations are illustrated graphically in Fig. 10.6.

Let the original price be. The firm chooses an output at which the marginal income (price) is equal to the marginal cost:. This equality is achieved at the point. Since, with such an output, the price exceeds the average total cost, the firm makes an economic profit.

If the price falls to the intersection of the price and marginal cost lines, the point will become, and the firm will reduce output to. However, at a point, the price is also equal to the average total cost. The latter means the equality of revenue and total costs. Therefore, at a price, the economic profit is zero. The latter does not mean at all that the company is on the verge of bankruptcy, because economic profit is, in fact, excess profit. Its disappearance does not affect the accounting profit that is normal for the firm, covering the implicit costs. It should not be forgotten that when we talk about costs, we always mean exactly economic costs, including both explicit and implicit costs.

But let us assume that the price fell even lower - to the level Choosing the volume of output (), the firm still follows the rule: the marginal income (price) must be equal to the marginal cost, which is achieved at the point. The problem, however, is that at such a low price, the firm is doomed to economic losses for any output: the average total cost curve () is always above the price line. Accordingly, maximizing profits in this case only means minimizing losses, since with more or less issues, losses will be even higher. It is precisely such a case that has just been considered on the basis of the data in Table. 10.3.

Rice. 10.6. The getaway point and the supply curve of a competitive firm

As already mentioned, the question arises before the firm: to close or continue to work. In the short term, the firm will prefer not to leave the market, putting up with losses. The fact is that if it stops production, losses will increase, since fixed costs will still have to be borne. It is important that the price exceeds the average variable costs () at release, respectively, the revenue exceeds the variable costs (), and the firm can use this difference to partially cover losses arising from the presence of fixed costs.

This implies that the firm will operate in the short run until the price falls below the minimum of average variable costs (point). If the price falls below, it makes no sense to continue, since the price will not cover even the average variable costs, which means that the production of each next unit of production will only increase the losses. Therefore, the minimum point of average variable costs is called point of escape.

Let's summarize. When the price falls below the minimum, the firm's output falls to zero. With more high prices the firm continues production, at least for a short period. In this case, the volume of output is determined by the point of intersection of the price line with the marginal cost curve. So, at the price, the point of intersection will be the point, and the issue will be. At the price, the point of intersection will be the point, and the output will be, and so on. Therefore, the marginal cost curve above the minimum point of the average variable cost contains all the points reflecting the change in the firm's output due to the change in the market price. Therefore, she is the supply curve of a perfectly competitive firm in the short run(curve MC =S in fig. 10.6).

The supply curve of all firms is obtained by horizontally summing the supply curves of individual firms.

Simplified cost functions and break-even point

Let's connect the revenue and total cost lines in one figure (Figure 10.7). In this case, we will rely on simplified cost functions, when the marginal costs are constant, respectively, the total cost function is linear (topic 9, p. 9.4). It is these costs that are most often considered in practical research.

The figure shows that with zero output, the firm's revenue is also zero. As for the total costs, they are not equal to zero at zero output, since fixed costs have to be borne anyway. Therefore, at zero output, the total costs coincide with the fixed costs (). This implies that at zero output, the firm incurs losses in the amount of fixed costs.

Rice. 10.7. Break even

Then, as output increases, the revenue and total cost lines converge, crossing at some point. At this point called break-even point, revenue is equal to total costs, respectively, the firm's profit is zero. The release corresponds to the break-even state. If the actual output turns out to be less than this value, the firm will incur a loss, because the costs will exceed the revenue (the size of the loss will be equal to the distance between the TC and TR lines). If the output turns out to be higher, the revenue will exceed the costs, and the firm will receive economic profit (its size will be equal to the distance between the lines TR and TS).

Since at the break-even point the revenue is equal to the total cost (TR = TC), it follows that the price is equal to the average total cost (P = AC).

As for the maximum profit, in this case it is achieved with an infinitely large output.

For example, a company sells goods for 5 rubles. a piece. The average variable costs are unchanged and equal to 3 rubles. Fixed costs are 200 rubles. in a day. Then

In other words, if a firm sells 100 units a day, it will make ends meet, although it will not make an economic profit.

The situation can be presented in the form of a table (Table 10.4).

Table 10.4. Break even

If the actual sales exceed the break-even point, then each additional product sold generates an economic profit in the amount of the difference between the price and the average variable costs.

Long-term balance of the firm and the industry

In the long run, in contrast to the short run, all production resources are variable. As a result, the firm has a greater, than in the short run, the ability to change the level of output. On the other hand, in the long run, the number of firms in the industry may also change. Both of these factors contribute to achieving long-term equilibrium in a highly competitive market.

Under industry in this case, we mean a set of manufacturers - firms offering completely homogeneous goods for sale. The industry is in a state long-term balance, when none of the firms in the industry seeks to enter or exit the industry; and when none of the firms in the industry seeks to either increase or decrease their output.

Suppose a very large number of firms operate in an industry with the same marginal and average cost functions. Choosing its level of output, an individual competitive firm is guided by the market price (Figure 10.8).

Rice. 10.8. Long-term equilibrium of the firm and the industry

In the short run at the market price (Fig. 10.8a), the firm chooses the output () corresponding to the intersection of the price line and the short-term marginal cost curve (MC - Fig. 10.86). At the same time, she receives an economic profit equal to the area.

In the long run, the firm has the ability to increase production. At the same time, to maximize profits at the same price (), it chooses output (), at which the price is equal to long-term marginal costs (). As a result, at the price, the firm increases its economic profit, which now corresponds to the area.

However, all other firms also increase their own, which leads to an increase in market supply (a shift in the supply curve to the right in Figure 10.8a) and a decrease in price. On the other hand, new firms are invading the industry, attracted by economic profits, which further increases supply. This growth in supply continues until the supply curve comes from position to position (Figure 10.8a). At the same time, the price falls to the level, i.e. to the level of minimum long-term average costs of an individual firm (Fig. 10.86). Its output is now equal, the long-term average cost of such output is minimal, and the economic profit earned by the firm disappears. New firms cease to enter the industry, and existing firms lose the incentive to reduce or expand production. A long-term balance has been reached.

In fig. 10.86 shows that in conditions of long-term equilibrium with perfect competition, equality is achieved

P = LMC = LAC.

In other words, the market price at which a firm sells its products is equal to its long-run marginal cost and, at the same time, the minimum long-run average cost.

Let's summarize:

• in a highly competitive environment where firms are free to leave and enter the industry, no firm is able to make economic profit in a long period(excess profit);
• perfect competition leads to efficient use of available resources. The point here is that economically efficient production means output at which unit costs (long run average costs) are minimal. It is to such volumes of output that all completely competitive firms come, in the end.