Perfect short and long term competition. Perfect competition. Equilibrium of a competitive firm in the long run

6.2. Perfect competition. Equilibrium in the short and long term

Market in conditions perfect competition the following features are inherent:

1. A large number of firms operate in this market, each of which is independent of the behavior of other firms and makes decisions independently. Any firm in the industry is unable to influence the market price of the goods produced by the industry.

2. Firms of the industry produce one and the same (homogeneous) product, therefore for buyers it is absolutely indifferent which product of which firm to purchase.

3. The industry is open to entry and exit of any number of firms. Not a single company in the industry takes any resistance, as there are no legal restrictions to this process.

Individual firm demand. Since, in conditions of perfect competition, the firm of the industry, within the boundaries of changes in the volume of its output, does not have a significant effect on the price of goods and sells any amount of goods at a constant price, the demand for the products of an individual firm is absolutely elastic, and the demand curve of each firm is horizontal. In addition, each additionally sold unit of goods will add the same amount of marginal revenue equal to the price of the goods to the total revenue of the firm.

Consequently, for an individual firm operating in a perfectly competitive market, the average and marginal revenue are equal to the price of goods P, i.e. MR = AR = P, therefore the curves of demand, average and marginal revenue coincide and represent the same horizontal line drawn at the level of the price of the product.

Equilibrium in the short and long term

According to rules 1 and 2 (see Topic 6.1), operating in each market structure, a firm, in order to maximize profits, must produce such a volume of goods and services. q E at which MR = MC(rule 2) and P> AVC(rule 1). But in conditions of perfect competition, the marginal revenue MR is equal to the average revenue AR and the price of the product, i.e. MR = AR = P.

This means that, operating in a perfectly competitive market, a firm will maximize profits if it produces such a volume of q goods at which marginal costs are equal to the price of a good set by the market regardless of the firm's actions.

This situation is reflected in Fig. 13.

Rice. 13. Equilibrium in the short run

By producing Qе units of a commodity when MC = P, the firm maximizes profit, and any deviations from this volume reduce its profit. If the firm will release Q1< Qe единиц товара, то цена товара (которая не меняется) станет превосходить предельные издержки, и фирма обязана в этих условиях увеличить производство, иначе она не максимизирует прибыль. Когда же Q2 >Qе, marginal costs begin to exceed the price and the firm needs to reduce the volume of output.

Note that at point E1 the marginal costs MR are also equal to the price of goods P, but at point E (not E1) the price P exceeds the average variable costs AVC, i.e. Rule 1 is satisfied. Hence, it is at point E, not E1 that the firm has an equilibrium in the short run.

Supply curve in the short run. The market price of the product. Suppose that the initial price P under the influence of the market has increased to P e1. As has just been shown, under these conditions the firm will increase its output to such a level Q e1, when the marginal cost is again equal to P e1. Therefore, for any price Pi that exceeds AVC, the firm will produce so many units of the good that the marginal cost MCi corresponding to this volume of production equals Pi. But since the MC curve shows the value of marginal costs for any values of Q, then the points of the MC curve will determine the volumes of production at all values of the price when MC = P. In addition, according to rule 1, if the price of a product falls below the AVC value, then the firm will stop existence and Q = 0. But, as you know, the curve showing the ratio of the price of a product to the number of units offered by the firm for sale is the supply curve.

An important conclusion follows from this: the supply curve of a firm operating in the short run in perfect competition is the segment of the marginal cost curve above the AVC curve(segment VC in Fig. 13).

If there are N firms in the industry, then supply curves can be similarly constructed for each of them. Then the supply curve of an industry can be obtained by horizontal summation of the supply curves of individual firms.

The market price of a product in perfect competition is determined by the intersection of the industry supply curve and the market demand curve. Although each firm in the industry does not significantly affect the market for a product, the joint actions of all firms in the industry (as reflected by the supply curve of the industry), as well as collective actions of households (as reflected in the market demand curve) can lead to displacements of supply and demand curves and changes in the equilibrium price. ... But at the new equilibrium price, each firm will strive to produce so many units of a homogeneous product that MC = P. At such volumes of output, the QS of the industry equals the market QD, and equilibrium occurs in the industry.

However, for the company, the amount of profit it makes is of great importance. The firm makes a profit if the revenue per unit of production, i.e. AR, exceeds the cost per unit of production, i.e. ATC. But since AR = P, then this is tantamount to the statement that the firm makes an economic profit whenever the market price of the product exceeds the average total costs, i.e. when P> ATC... This means that depending on the value of the market price of the product, three options are possible.

1. The price of the goods is lower than the average total costs for the volume of production q, when MC = P; in this case, the firm will have losses (Fig. 14a).

2. With the volume of production q, the price of the goods coincides with the value of the average total costs and the economic profit is equal to zero. The volume of output in this case reflects the so-called break-even point (Fig. 14b). The level of instability is observed when the total costs are equal to the total revenue ТС = TR or when the marginal and average costs are equal (MC = ATC).

3. The price of the product is higher than the average total costs for the release of q units of the product; in this case, the firm will make a profit (Fig. 14 c).

Rice. 14. Possible options for equilibrium in the short term

Consequently, the firm, predicting its activities, must determine the production volumes at which the minimum values of ATC and AVC are achieved. They will serve as a guideline for the behavior of the company in the given market structure, allowing you to find the break-even level and the point of stopping production.

Long-term balance

Over the long term, firms can adapt to various changes in the market. For a long-term period in a perfectly competitive market, the following conditions are characteristic:

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 a long-term period, maximizes profit by producing such a volume of output when MS = P.

2. There is no incentive for firms in other industries to enter the industry. In other words, all firms in the industry have a production volume corresponding to the minimum average total costs in each short-term period, and receive zero profit, i.e. SATC = P.

3. Firms in the industry do not have the ability to reduce the total costs per unit of production and make a profit by expanding the scale of production. This is equivalent to the condition that each firm in the industry produces a volume of output q * corresponding to the minimum of average total costs in the long run, where the LATC curve has a minimum.

It is important to note that since firms are free to enter and exit the industry in perfect competition, each firm will have zero economic profit in equilibrium in the long run.

(Materials are given on the basis of: V.F.Maksimov, L.V. Goryainov. Microeconomics. Educational-methodical complex. - M.: Publishing center EAOI, 2008. ISBN 978-5-374-00064-1)

So far, we have looked at changes in sectoral output that have been the result of individual firms' decisions to increase or decrease output when the market price changes. In doing so, however, we have abstracted away from a very important part of a competitive industry's response to changes in demand — from the processes of entering and exiting an industry.

Consideration of entry and exit processes implies a transition to the analysis of long-term time intervals, since only short-term intervals do not provide the entire picture. The ability of long-term time intervals to change the volumes of all types of costs (including such as costs for land, buildings, production equipment, etc.) allows the company to independently enter the market by founding its own enterprise and hiring workers. The same opportunity allows the company to freely leave the market, paying off with the employees and selling the company with all the equipment. (Sometimes firms voluntarily leave the market; in this case, the owners sell the firm's assets and divide the funds among themselves. In other cases, firms leave the market only under the influence of external forces. This happens when the firm's creditors resort to using the solution arbitration court, which prescribes a forced sale of the assets of a firm that is unable to pay debts.).

Free entry into the industry and equally free exit from it is one of the main features of the free competition market. Freedom of entry, of course, does not mean that a firm can enter an industry without incurring any travel costs. Likewise, freedom of exit means that a firm that intends to leave the industry will not encounter any legal barriers in its path that prevent a business from closing or relocating its activities to another region. Strictly speaking, freedom of exit means that the firm has no irrecoverable costs. When a firm leaves the industry, it either finds new uses for its permanent assets, or sells them without prejudice to itself.

Free entry and exit has not yet played an active role in our discussion of how a firm makes decisions about short-term demand. Nevertheless, as we can see below, this is a condition without which it is impossible to understand a competitive market in the long run.

The firm has a plant whose size is precisely such that the short-run average total cost is exactly the lowest possible long-run average cost at the chosen output level. A short run average total cost curve for any other size enterprise would show a higher average total cost for the chosen output. Downsizing will shift the short-run average total cost curve up and to the left along the long-run average cost curve; increasing the size of the enterprise will move it up and to the right.

Both long-run average costs and short-run average total (total) costs are equal to the price at an equilibrium level of output. This circumstance guarantees the absence of motives that induce firms to both re-enter the market and leave it. As usual, average and total costs are composed of explicit monetary and implicit costs, including opportunity cost of capital or "normal profit". When the price is equal to the average total cost, the firm receives zero economic profit. If the economic profit is positive, it will attract new firms to the industry; if it is negative, it will cause old firms to leave the industry.

When adding the supply curves, we proceed from the assumption that prices for all types of inputs (resources, etc.) do not change with the expansion of output. For a small firm operating in perfect competition, this assumption is quite realistic. However, if all firms in the industry are trying to increase output at the same time, our assumption may be false. In practice, resource prices will rise unless the short-term supply curves of the resources (all kinds of inputs) used in the industry are perfectly elastic. If the prices of all inputs rise as the total output of the entire industry increases, the cost curves of each individual firm will move upward as the output of all firms rises. In such a case, the short-term supply curve for the industry will have a slightly steeper slope than the curve obtained by summing the individual supply curves.

We have used the term "equilibrium" more than once to denote a state of affairs in the economy in which the persons taking economic solutions do not have any incentive to change their plans. In order for a firm in the market of perfect competition to be "in a state of long-term equilibrium, the following three conditions must be met:

1. The firm should not have incentives to increase or decrease the volume of output in the presence of given sizes manufacturing enterprise (that is, when given value fixed costs used in production). This means that the short-term marginal cost must be equal to the short-term marginal return. In other words, the conditions short-term equilibrium is also a condition for long-term balance.
2. Each firm must be satisfied with the size of the enterprise it has (that is, the volumes of fixed costs of all kinds used).
3. There should be no incentive for firms to enter or exit the industry.

As Figure 4 shows, price (and marginal revenue) is set at a level where it is equal to the minimum average total cost: P (and MR) = minATC. Since the curve of marginal costs intersects the curve of average total costs at the minimum point of the latter, then at this point the marginal and average total costs are equal to each other: MC = minATC. Thus, in the equilibrium position, comprehensive equality is really established: P (and MR) = MC = minATC.

This triple equality suggests that, although in the short run a competitive firm can make economic gains or incur losses, in the long run, carrying out production in accordance with the rule of equality of marginal income (price) and marginal costs (MR (= P) = MC ), she only earns a normal profit.

Figure 4. Long-run equilibrium position of a competitive firm: price = marginal cost = minimum average total cost.

Hence, the equality of price and minimum average total costs shows that the firm tests the most efficient known technology, assigns the lowest price P to its product, and produces the largest volume of output Q for the costs it incurs. Equality of price and marginal cost indicates that resources are allocated according to consumer preferences.

If even one of these conditions is not met, then firms have good reasons to change their plans. If the price is not equal to short-run marginal cost, then firms will want to change the level of output, leaving the size of the firm unchanged. If short-run average total costs are not equal to long-run total costs, firms will intend to resize firms. If the price is below the long-run average cost, firms will simply want to leave the industry; Finally, if the price exceeds long-term costs, then firms outside the industry will be tempted to enter it.

The long-term supply curve reflects the path taken by equilibrium price and the volume of output under long-term changes in demand. In order for the movement along this curve to take place, firms must have sufficient time to adjust the size of their manufacturing enterprises and for entering and exiting the market.

Thus, the condition of equilibrium of the firm, both in the short and in the long run, can be formulated as follows: MC = MR. Any profit-making firm seeks to establish such a volume of production at which this equilibrium condition is met. In the market of perfect competition, marginal income is always equal to price, so the equilibrium condition for the firm takes the form MC = P.

In today's economy, it is almost impossible to find a free, or completely competitive, market. Therefore, most often such a market is considered as a model that allows you to determine how a particular real market corresponds to the conditions of perfect competition.

Markets that do not meet the conditions of perfect competition are called markets imperfect competition... The next chapter focuses on general characteristics and the peculiarities of the functioning of one of the market structures of imperfect competition - pure monopoly.

This chapter will discuss what influence the market can have on the behavior of a firm, or, conversely, what power over the market a firm can have. The interaction of the firm and the market is critically dependent on the structure of the market or the types of market structure.

Market structure refers to the nature of competition among firms and the presence of monopoly power, as well as the degree of their influence on the decisions made by firms.
The main questions of the lecture:
Types of market structures.
Characteristics of the market of perfect competition.
The activity of a competitive firm in the short run.
Equilibrium of the firm and the industry in the long run.
Perfect competition and economic efficiency.
10.1. Types of market structures
One of the most important factors dictating the general conditions for the functioning of markets is the degree of development of competitive relations on it. Market competition is the struggle for limited consumer demand between firms in the parts of the market available 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 sectoral markets are formed, characterized by varying degrees of competition.
In economic science, the following types of market structures are distinguished.
Perfect competition is a type of competition in which firms lack market power and compete on price. Its characteristic feature is that sellers cannot increase their income by increasing prices and the only way for them to obtain economic profit
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is to reduce production costs, and perfect competition becomes a condition for ensuring maximum efficiency of the economy.
Imperfect competition is a type of economy in which firms have market power and compete for sales. This type competition is a way of rivalry between firms with different sizes and costs, product distinguishing characteristics and different purposes, as well as applying different competitive strategies... Its distinctive feature is the use of predominantly non-price methods of competition. Meet different kinds imperfect competition:
Pure monopoly. A market is considered to be absolutely monopoly if there is only one manufacturer of a product operating on it, and this product has no close substitutes in other industries.

Therefore, in a purely monopoly environment, industry boundaries and firm boundaries 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 market situation where there is only one buyer. The buyer's monopsony power leads to the buyer being the price creator.
A monopoly that practices discrimination. Typically, this refers to the practice of companies to assign different prices to one product for different buyers.
Bilateral monopoly. A market in which one buyer with 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 industry's output. In such a market, firms recognize the interdependence of their sales, production, investment and advertising.
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10.2. Characteristics of the market of perfect competition
For perfect competition to exist, the following prerequisites 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 in comparison with the total volume of the market that the decision to decrease or increase their volumes does not create either surplus or deficits.
Absolute mobility of material, financial, labor and other factors of production in the long run. This means that resources are completely mobile and can be easily moved from one activity to another. The absence of barriers means absolute flexibility and adaptability of the perfect competition market.
Full awareness of all participants in the competition about market conditions... There are no trade secrets, unpredictable development of events, unexpected actions of competitors. That is, decisions are made by the firm in conditions of complete certainty regarding the market situation.
Absolute homogeneity of goods of the same name. Since the products of firms are indistinguishable, no buyer is willing to pay a higher price to a particular firm than he would pay its competitors. If one of the sellers raises the price, then the buyers immediately leave him and buy the goods from his competitors. Since the prices are the same, buyers don't care which company they buy.
No participant in free competition can influence the decisions made by other participants. Since the number of market actors is very large, the contribution of each producer to the total volume of production is negligible, as is the demand of an individual consumer. This means that each of them individually is not able to influence the price of the product. They form the market price only by joint actions.
Thus, in the perfect competition model, the market price is the independent variable, and the firm under these conditions is often called the price taker. Her choice is reduced only to making a decision on the size of the issue.
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In perfect competition, the demand curve for the firm's products will look like a horizontal line. From an economic point of view, the price line parallel to the abscissa indicates the absolute elasticity of demand. The presence of an absolutely elastic demand for the company's products is usually called the criterion of perfect competition. As soon as such a 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 for any volume of output is equal to the price of the good and that the marginal income is always at the same level.
10.3. A competitive firm's short-term performance
Principal variants of the firm's behavior. For
a firm operating in the short term, there are three fundamental options for behavior: production for the sake of maximizing profits; production for the sake of minimizing losses; discontinuation of production.
Profit maximization takes place when the price exceeds the average total cost (P> ATCmin). Price (P) exceeds the minimum average total cost (ATCmin), therefore, in principle, it is possible to make a profit.
The second option - minimization of losses - is realized when the market price of the company's products is higher than the minimum value of average variable costs, but less than the minimum value of average total costs, i.e.
(АТСтш> 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 size of fixed costs and exceed the amount they would have had if production had been preserved. That is why the enterprise continues to manufacture products and suffers losses, only minimizing them.
In the event that the market price of the product is lower minimum value 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 issued unit adds to the inevitable loss in the amount of fixed costs the uncovered part of the variable costs associated with the release of this product. Under these conditions, the larger the production, the greater the losses.
Profit maximization and the MC = MR rule. The choice of the principal option of behavior is only the first step of the firm in optimizing its position in the market. The next step is to accurately establish the volume of production that maximizes profits or (under less favorable conditions) minimizes losses. Note that the rule of profit maximization MR = МС is valid not only for perfect competition conditions, but also for other types of markets.
In perfect competition, marginal revenue is equal to the price of the good. Therefore, the rule MR = MC can be presented in a different form:
P = MR = MC, or P = MC.
That is, in conditions of perfect competition, profit maximization is achieved when the volume of production corresponds to the point of equality of marginal costs and prices.
10.4. Long-term balance of the firm and the industry
Entry into and out of the market of perfect competition is open to all firms, without exception. Therefore, in the long term, the level of profitability becomes the regulator of the resources used in the industry. If the established level in the industry market prices above the minimum average costs, the possibility of obtaining economic profits will serve as an incentive for new firms to enter this 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, scaring away entrepreneurs and reducing the amount of resources used in the industry.
The relationship between the level of profitability in a competitive industry and the amount of resources used in it, and therefore
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the volume of supply, predetermines the break-even rate of firms operating in a competitive industry in the long run (or their receipt of zero economic profit).
Suppose that in a competitive industry initially there is an equilibrium dictating a certain price level at which the firm receives zero profit in the short run. Suppose there is an unexpected increase in demand for the industry's products. The industry demand curve in this situation 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 profits. Economic profits will attract new producers to the industry. The consequence of this will be the formation of a new supply curve, shifted in comparison with the original to the right. A new, slightly lower price level will also be established. If economic profits remain at this price level, then the influx of new firms will continue, and the supply curve will shift even more 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 the firms already operating in the industry. Obviously, both of these processes will continue until the supply curve takes a position that means zero profit for firms. And only then will the influx of new firms dry up - there will be no more incentive for it.
The same chain of consequences (but in the opposite direction) unfolds in the event of economic losses: reduced demand; falling prices; the emergence of economic losses for firms; the outflow of firms and resources from the industry; reduction in long-term market supply; price increase; restoration of breakeven; stopping the outflow of firms and resources from the industry.
Thus, perfect competition has a kind of self-regulation mechanism. Its essence lies in the fact that the industry is flexible in responding to changes in demand. It attracts such a volume of resources that it increases or decreases the volume of supply just as much as necessary to compensate for the change in demand. And on this basis it ensures the long-term break-even of firms.
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Summarizing, we can say that the equilibrium in the industry in the long run satisfies three conditions:
the conditions of short-term equilibrium are fulfilled, i.e. short-term marginal cost is equal to short-term marginal income and price (P = MR = MC);
each of the firms is satisfied with the volume of production capacities used (short-term average total costs are equal to the lowest possible long-term average costs (ATC = LATC);
min min
the firm receives zero economic profit, i.e. excess profits are not generated, and therefore there are no firms willing to enter or leave the industry (P = ATCmin).
All three of these conditions for long-term equilibrium can be summarized as follows:
P = MR = MC = ATC. = LATC.
min min
10.5. Perfect competition and economic efficiency
Analyzing the above condition for long-term equilibrium, the following positive features of the market of perfect competition can be distinguished:
1. Production in conditions of perfect competition is organized in the most technologically efficient way. This is determined by the fact that equilibrium is established at the level of long-term and short-term minimum of average costs.
1. The firm and the industry operate without surpluses and deficits. Indeed, the demand curve for perfect competition coincides with the marginal revenue curve (D = MR), and the supply curve with the marginal cost curve (S = MC). Therefore, the condition of long-term equilibrium in a competitive industry is actually tantamount to the identity of supply and demand for a given product (since MR = MC, then D = S). Consequently, we can say that perfect competition leads to an optimal allocation of resources: the industry involves them in production exactly to the extent that is necessary to cover effective demand.
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2. Break-even of firms in the long run (P = LATC.). On the one hand, this guarantees the stability of the industry - firms do not incur losses. On the other hand, there are no economic profits either, i.e. income is not redistributed in favor of this industry from other sectors of the economy.
The combination of the listed advantages makes perfect competition one of the most efficient types of the 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.
At the same time, perfect competition is not without a number of disadvantages:
Small businesses, typical of this type of market, are often unable to use the most effective technique... The point is that economies of scale are often only available to large firms.
The market for perfect competition does not stimulate scientific and technical progress. Small firms usually lack the funds to finance long and costly research and development activities.
Thus, for all its merits, the market of perfect competition should not be idealized. The small size of companies operating in the market of perfect competition makes it difficult for them to operate in a modern world saturated with large-scale technology and permeated with innovation processes.
Key words and concepts
Perfect competition, imperfect competition, monopolistic competition, oligopoly, monopoly, duopoly, monopsony, demand curve for the products of a competitive firm, long-term equilibrium position.
Questions for self-examination and review
What are the criteria for the market of perfect competition?
Why is the demand curve for the products of a competitive firm a horizontal line, and the demand curve for everything competitive market has a negative slope?
What are the principal options for the firm's behavior in the short and long term?
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What are the ways for businesses to reach the break-even point?
Firms producing at a loss must necessarily close immediately. Is this always true?
Under what conditions does a competitive firm reach equilibrium?
Explain if competitive firms can develop if they receive zero profits in the long run?
What role does the absence of barriers in the market for perfect competition play in establishing zero economic profit in the long run?
Explain at what volume of output the competitive firm will achieve optimal scale in the long run?
Is perfect competition the most efficient type of market?
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Perfect competition and its characteristics

Depending on the structure, the market can be a market of perfect competition, a market of monopolistic competition, monopoly and oligopoly.

Definition 1

Perfect competition is a type of market structure that is characterized by the presence on the market of many (usually large) firms producing homogeneous products, relatively easy entry and exit from the market, and high level availability of information about the state of the market to all its subjects.

This type of market structure has the most ancient origin, while it is the simplest and most understandable in terms of pricing, the basis of which is provided only by the interaction of market supply and demand. This pricing mechanism is most suitable for determining the costs of production and sales, profitability and profitability of the organization.

A characteristic feature of the market of perfect competition is a standardized product with homogeneous consumer properties. The presence of such a product ensures the buyer's indifference to trade marks, he does not care which manufacturer to buy the product from. As a result, the price, the value of which is determined by the market, is the only significant criterion for choosing a product. The pricing process is determined by the essence of the market mechanism, in which the price is formed by establishing an equilibrium between market supply and demand.

At the same time, each specific manufacturer does not take part in pricing, but follows the price that has already formed in the market in a natural way.

The demand for a product of a specific shape is shown by a straight horizontal line.

The indicators of the firm's income are determined by the following formulas.

Total (cumulative):

$ TR = P \ cdot Q $, where:

$ TR $ - total revenue, monetary units;
$ P $ - the price of the good (price), monetary units;
$ Q $ - realized quantity of goods (quantity), units.

Average:

$ AR = \ frac (TR) (Q) = \ frac (P \ cdot Q) (Q) = P $

where $ AR $ is the average revenue, in monetary units.

Limit:

$ MR = \ frac (∆TR) (∆Q) = \ frac (∆ (P \ cdot Q)) (∆Q) = P \ cdot \ frac (∆Q) (∆Q) = P $

where $ MR $ is marginal revenue, in monetary units.

Regardless of the volume of additionally produced products, the firm has no opportunity to influence the price of the goods. As a result, the sale of any additional unit of goods is carried out at the same price as those preceding it.

Features of perfect competition in the long run

The long-term period refers to the time sufficient for a firm to enter and exit the industry.

The long-term period of perfect competition is characterized by the special interaction of supply and demand of a competitive firm.

Under these conditions, the demand curve of such a firm acts as a characteristic of the volume of products produced at each price level to achieve the maximum profit in the long run.

The long-term range of the competitive firm's supply curve is represented by the portion of the $ LMC $ curve above $ LACmin $, which is the long-term break-even price.

Figure 1. The ratio of supply and demand. Author24 - online exchange of student papers

Definition 2

The long-term break-even price is the minimum price that provides the firm with cost coverage only in the long run.

Getting a firm in the long run of high profits is a factor that attracts other participants to the market. The resulting increase in sales leads to a decrease in the price of the product and the displacement of small firms with non-technological production from the market. The ongoing fluctuations will stop when the price of the product reaches the $ LACmin $ level. At this point, the market will lose its attractiveness to new firms, since the firms operating in the market will receive zero profits. That is, firms that have already mastered the market by that time will have accounting, but not economic (including implicit costs) profit. As a result, these firms will have no incentive to exit the market, while new firms will have no incentive to enter.

In the long run, equilibrium will be established in the industry, which is expressed in the absence of firms' desire to leave the industry, to enter it, to increase or decrease production volumes.

A competitive market in the long term is characterized by three main points:

first, the coincidence of supply and demand in the market, providing an equilibrium price that suits both sellers and buyers;
secondly, the finding of all firms in the industry in an equilibrium position that provides them with the maximum profit;
thirdly, the receipt of zero profit by all firms.

The creation of such conditions requires long period time, in a short period of time, firms have the opportunity to obtain high economic profits.

Experts note the presence of a profit paradox: the receipt of economic profit in the industry, the value of which exceeds zero, acts as an incentive to attract new firms to enter the market. An increase in the number of sellers ensures an increase in supply, which leads to a decrease in prices and the establishment of a new equilibrium in which the value of economic profit reaches zero. In this way, firms achieve equilibrium in the long run, receiving zero profits, which leads to a lack of desire to enter or exit the industry. This moment characterizes the achievement of production efficiency by the company.

In the long run, the determination of the market supply is carried out by summing the supply of all firms operating on the market. The graphical expression of the supply curve in the long run depends on the dynamics of the level of costs under the influence of an increase in production. This factor determines the positive or negative slope of the curve. With absolute elasticity of supply and, as a consequence of the independence of average costs from the number of firms in the market, the supply curve takes a horizontal position.

The long-term supply curve depends on changes in the long-term level of the industry's costs as the volume of output expands. Depending on this, it has a positive or negative slope. If the average costs do not change depending on the change in the number of firms in the industry, the supply of the industry is absolutely elastic, the supply curve is horizontal.

7.3.1. Long-term balance of the firm and the industry

Profit level as a regulator of attracting resources

Entry into and out of the market of perfect competition is open to all firms, without exception. Therefore, in the long run, the level of profitability becomes a regulator of the resources used in the industry.

If the established level of market prices in the industry is higher than the minimum 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.

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

economic

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

long-term break-even rate of firms operating in a competitive industry(or, equivalently, they receive zero economic profit). The mechanism for establishing 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), dictating a certain price level P Q, at which the firm (Fig. 7.14 but) in the short term, it makes zero profit. Let us further assume that the demand for the industry's products has unexpectedly increased. In this situation, the industry demand curve D 0 will move to the 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 become a source of economic profits (the price is above the level of the average total costs of the 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 in comparison with the original in the direction of large production volumes. A new, slightly reduced price level P 2 will also be established. If economic profits remain at this price level (as in our figure), then the influx of new firms will continue, and the supply curve will shift even more 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 the firms already operating in the industry. Gradually, they will all reach the level of minimum averages. long-term costs(LATC), i.e. achieved optimal size enterprises (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 profit for firms. And only then will the influx of new firms dry up - there will be no more incentive for it.

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

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

Thus, perfect competition has a kind of self-regulation mechanism. Its essence lies in the fact that the industry is flexible in responding to changes in demand. It attracts such a volume of resources that it increases or decreases the volume of supply just as much as necessary to compensate for the change in demand. And on this basis it ensures the long-term break-even of firms.

long-term

equilibrium

Summarizing, we can say that the equilibrium 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 income and price (P = MR = MC);
2) each of the firms is satisfied with the volumes of production capacity used (short-term average total costs are equal to the smallest possible long-term average costs of ATC. = LATC.);
3) the firm receives zero economic profit, i.e. excess profit is not generated, and therefore there are no firms willing to enter or leave the industry (P = ATC min).

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

Long-term supply curve of the industry

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 an industry with constant (a), growing (b) and falling (in) costs

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

So, general principle is that The long-term supply curve of a competitive industry is the line that crosses the break-even point for each level of production. In fig. 7.15 shows different variants of the manifestation of this pattern.

Fixed Cost Industries

In the considered by us specific example(see Fig. 7.14) such a line is a straight line parallel to the abscissa axis and corresponding to the absolute elastic

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

As a rule, this condition is fulfilled for industries that are relatively small in size relative to the size 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. gas stations... Inflation aside, building reservoirs, purchasing pumps, hiring personnel, etc. cost for the construction of each additional station in about the same amount (the differences can only be associated with 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 be the same all the time. We have depicted this situation in Fig. 7.15 a, combining on one graph the long-term supply curve of the industry (S L) and the cost curves of a typical firm (ATS 1, ATS 2, ATS 3) corresponding to a given level of industry-wide production.

For a market of perfect competition, this situation is quite typical. Let us recall stalls and shops of various profiles, workshops for the repair and manufacture of various goods, mini-bakeries, pastry shops, etc. All these types of businesses are small on a national scale, 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 the industry for a particular resource turns out to be so significant that it creates a deficit 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 these factors increases.

With an increase in long-term costs, firms-newcomers to the industry will reach the level of zero economic profit with more high price than the old-timers. Referring again to Fig. 7.14, then we can say that the influx of new firms into the industry will not bring the supply to the level of the curve S 3, but will stop earlier, say, in position S 2, in which firms will find themselves in a new (taking into account the rise in resource prices) 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 production volume of 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 rise of the S L curve.

Costs rise especially quickly 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, when production expands, cost increases may affect even small industries. After all, unique resources are always available in very limited quantities. So, in the history of Russia in the XIX century. 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 faced the depletion of reserves of this mineral in the Urals. The once cheap ("cheerful") stone quickly became expensive, even the tsars did not neglect handicrafts made from it, which is perfectly described by P. Bazhov.

Falling cost industries

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

The long-term supply curve of the falling-cost industry has a negative slope (Figure 7.15 in).

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

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 once again reproduce 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 equilibrium is established at the level of long-term and short-term minimum of average costs. This clearly indicates that production in conditions of perfect competition is organized in the most technologically efficient way.
2. Equally important is the fact that both the firm and the industry operate without surpluses and deficits. Indeed, the demand curve for perfect competition coincides with the marginal revenue curve (D = MR), and the supply curve 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 S = D). Consequently, we can say that perfect competition leads to an optimal allocation of resources: the industry involves them in production exactly to the extent that is necessary to cover effective demand.
3. Finally, the break-even rate of firms in the long run (P = LATC min) is also of fundamental importance. This, on the one hand, guarantees the stability of the industry: firms do not incur losses. On the other hand, there are no economic profits either, that is, incomes are not redistributed in favor of this industry from other sectors of the economy.

The combination of the listed advantages undoubtedly makes perfect competition one of the most effective types of market. In fact, when economists talk about self-regulation of the market, automatically bringing the economy to a state of optimum- and this tradition goes back to Adam Smith, we can talk about perfect competition and just about her. Under no type of imperfect competition, the long-term equilibrium does not possess the listed set of properties: the minimum level of costs, the optimal allocation of resources, the absence of deficits and surpluses, and the absence of superprofits and losses.

Flaws

perfect

competition

Perfect competition is not without a number of disadvantages.

1. Small businesses, typical of this type of market, often fail to use the most efficient technique. The point is that economies of scale are often only available to large firms.
2. The market of perfect competition does not stimulate scientific and technological progress. Really, small firms there are usually not enough funds to finance the lengthy and costly research and development activities.

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

test 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 great, in your opinion?
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 income and costs?
7. Describe the supply curve of a competitive firm.
8. What is the role of the absence of barriers in establishing zero economic profit in the long run in a market of perfect competition?
9. Can perfect competition be considered the most efficient type of market? Give your reasoning.