The conditions for perfect competition are short. Types of market structures: perfect competition, monopolistic competition, oligopoly and monopoly. Features of the market of perfect competition
The volume of production (Q 1), at which stage I ends and stage II begins (stage of constant returns to scale), is
is called the minimum effective size (MED). This is the most
smaller production size, at which the firm minimizes the LATC. It allows you to define maximum possible the number of efficiently functioning enterprises at the national, regional or local market level. MED can be measured both in units of output (tons, pieces, etc.), and as a percentage of the market volume of this product.
2.6. A firm in a market of perfect competition
The company always faces the following questions:
1. Should products be manufactured?
2. If so, in what quantities?
3. What profit (loss) can you expect?
In each of the existing types of markets (perfect competition, monopoly, monopoly competition, oligopoly), the firm must be able to find answers to these questions.
Consider the actions of a firm in the market of perfect (pure, free) competition. Such a company is often called a competitor.
a rental company.
In perfect competition markets, there is no price control. A company operating in such a market is called The "price recipient". As you know, the signs of this type of market are:
many sellers and buyers of this product, each of which produces (buys) a small share of the total market volume;
complete homogeneity of the same products for buyers;
absolute mobility of material, labor, financial and other resources;
there are no entry and exit barriers;
the availability of a full volume of market information for each participant in the competition;
individual behavior of the participants in the competition, the absence of collusion and the influence of one participant on the decisions of others.
Let us first consider the actions of the firm on a short-term time interval, or in short term... In this case, we will assume that the only task of the firm (both in the short and long term) is to profit maximization, those. the difference between revenue (income) and costs. We know that a firm can pursue, especially in the short
period, other goals, taking into account the possible divergence of interests of owners and managers, as well as the occasional need to temporarily sacrifice current profits for the sake of implementing long-term strategic objectives. However, the deviation from the goal of maximizing profit is usually temporary, limited, otherwise the firm has little chance of survival.
According to the costs of the firm, its income (revenue) acts as total, average and marginal.
Total Gross Income or Revenue (TR) - the amount of money
received by the seller from the sale of a certain amount of goods.
TR = p × Q,
where p is the price of a unit of goods, Q is the amount of goods sold. Average revenue AR - revenue per unit of sale
of this product.
Marginal revenue MR- the increase in revenue received from the sale of an additional unit of goods.
AR = TR / Q, МR = ∆ TR / ∆ Q.
The market is perfect |
||||||||||
competition |
||||||||||
products |
a separate |
|||||||||
the seller |
absolutely |
|||||||||
given by |
||||||||||
market, p - const. |
||||||||||
Therefore, TR is directly proportional to Q, and AR = p. In addition, MR = p. The AR line coincides with p and MR and at the same time is the D demand line for the firm.
There are two approaches to allowing a firm to provide answers to the above three questions. The first approach is to comparetotal income with total costs.
Let's combine the TR and TC lines on the same chart. Q 1 and Q 2 - points of critical
volume. For Q the greatest profit. IN digital example (from table.π
11) Q 1 = 4. With this volume of issue, the total revenue (TR = 160) and total costs (TC = 162) are roughly the same: profit is close to zero. li (-2). Q opt = 8. Wherein TR = 320, TC = 260 and the profit turns out to be maximum: Q wholesale π max π = 60 units. Obviously, starting with the volume of output equal to Q = 12, the total costs of the firm already exceed the total revenue, and profits are replaced by losses. Table 11 Short term. Maximizing firm profits Costs At Limit Limit per unit POST-POST-GENERAL costs costs 3 = 1 × 2 7 = 3–6 8 = ∆ TC: ∆ Q 9 = ∆ TR: ∆ Q nominal profit. What should a company do if it does not make a profit for any volume of production? The decision depends primarily on the period in which the firm acts and makes a decision. In the short term, a firm can operate at a loss, counting on an improvement in the economic situation in the future: to reduce its own costs or to increase the prices of its products. In this case, it may be advantageous for the firm to continue production, but only on the condition that its proceeds are it raises variable costs. If there is no profit zone, i.e. the TR line is always below the TC line, the firm gets losses instead of profits. In this case, it is more profitable for the company to continue production only provided that TR> VC. The graph shows that when Q = Q opt, the firm's loss corresponds to the segment NL. In case of production interruption, the losses will be equal to FC's fixed costs. On the chart FC = NM> NL. If, for any volume of TR Q o fr Q Let us consider two situations in which a company in the short term can strive to minimize losses without stopping production (both situations can be represented by these graphs). In table 12, the firm stopped making profits due to a significant increase (compared to the data from table 11) fixed costs FC: they increased from 50 to 150 units. Nevertheless, the volume of output Q = 8 remains optimal for the firm. Table 12 Short term. Minimizing company losses With the release of Q = 8, which reduces losses to 40 units, the firm covers its variable costs with its proceeds: 320> 210. If we turn to the graph, then the NL segment is equal to 360-320 = 40 units, ie. the loss turns out to be less than fixed costs (40<150), LM = 110; Q = 8. Table 13 illustrates a situation when a firm stops making a profit due to a decrease in the market price (compared to the data from Table 11) for its products from 40 units. up to 30 units Table 13 Short term. Minimization of losses The data in the table indicate that in order to minimize losses, the firm should reduce the volume of output from Q = 8 to Q = 7. At the same time, the firm, receiving a loss equal to 12 units, also covers its variable costs: 210 - 172 = 38. If again refer to graph No. 2, then now NL = 12, LM = 38, Q opt = 7. Table 14 shows a situation in which further reduction selling price to the level of P = 20 units. put the company in front of the need to stop production. Table 14 Short term. Business closure case Even with production volumes equal to Q = 5 and Q = 6 (the left side of the table does not provide information about which of them is preferable), minimizing losses to the level of 80 units, the firm cannot cover variable costs with revenue: TR (100<130 и 120<150). The second approach is to compare marginal revenue with marginal cost.
The firm maximizes profit for such a volume of production and sales Q, at which the marginal revenue is equal to the marginal cost: MR = MC - "golden rule" for a firm... It is but- sieve is universal in nature, i.e. applicable to any type of market ka. Acts on the ascending part of the MC curve. Indeed, if we analyze the right-hand sides of the tables discussed above, we can see that when MR> MC, the volume of production can be increased, and when MR If the profit is equal to π = TR – TC and is maximized at the point at which a small increase in the volume of production does not change the value of profit (∆ П / ∆ Q = 0), then: ∆ P / ∆ Q = ∆ TR / ∆ Q-∆ TC / ∆ Q = 0 Since ∆ TR / ∆ Q = MR, and ∆ TC / ∆ Q = MC, then the conditions maximize profit positioning: MR = MC. perfect competition for the firm, as noted, presents a horizon this line, and thus som MR = AR = p. perfect competition the main Q wholesale lo takes the form p = MC. As with the first approach, three situations are possible here: maximizing profits, minimizing losses, and closing (stopping production). maximizes profit at Q opt, since at Q = Q opt is performed the main the new rule p = MC. MN - per unit ductions. Square straight square pо MNCо is in charge total Q wholesale economic profit. If you look at the right side of Table 11, you can see that the volume of output Q = 8, maximizing profit, satisfies the requirement of the “golden rule” MR = MC, albeit approximately: MC = 38, MR = P = 40. attention to an important circumstance: minimal the value of the average total costs of automatic telephone exchange is achieved with a different volume of output: Q = 7 (ATC = 31.7). If a firm wants to produce such a quantity of products that will provide it with a minimum of average total costs, then it will receive less profit than if the "golden rule" is followed. Valid: 58< 60. Note that the volume of output Q 0 = 1 (in Table 11) also leads to an approximate coincidence of the values of MR and MC, but since this occurs in the descending segment of the MC (see the graph and both tables), this volume of output is by no means is the most best for the firm. A similar law dimensionality can be seen and in tables 12, 13. Both situations with minimization losses are shown in the shown in the figure. minimizes losses at Q = Q opt. ATC – AVC = AFC - on standing costs for unit of issue. Q opt. When production stops, the company's losses will amount to an area C 0 MND, if production continues, the losses correspond to the area C 0 MLp 0, i.e. significantly less (by the value of p 0 LND). If for any volume of output Q from firm p The right-hand sides of Tables 12 and 13 (this is especially noticeable in Table 12) show that the volume of output Q wholesale, which minimizes losses, does not coincide with the volumes that minimize the average costs of AVC and ATS. It can be seen that with the optimal volume of output, the marginal income of the firm, equal to the price of the product, exceeds the level of average variable costs: MR> AVC, which allows the firm not to stop production in the short run. The firm's fixed costs, therefore, do not affect the firm's production decisions in the short run, while this strategy, when it is enough for the firm to cover its variable costs, is completely inappropriate in the long run. In the short run, the firm, as shown in Table 14, stops production if no volume of output MR = p allows her to offset variable costs. It can be seen from the right side of the table that even in the case of MR = MC, the value MR = p (20) turns out less than AVC (25). Such a firm is uncompetitive in the short run. If there is a potential for her to improve the situation in the future, she should only temporarily suspend production. If there are no favorable prospects, it is necessary to leave this Q business, close the business. This graph shows on a situation in which the firm ma gets zero savings minimum profit. A similar the situation is typical for firms operating on long-term interval. There are difficulties in correctly assessing the limiting values latency that a manager often encounters. Since average variable costs are much easier to calculate than marginal ones, in practice, when using the “golden rule” of a firm, managers often make a similar substitution: instead of MC, use the AVC value... This is acceptable for situations where marginal and average costs are almost constant, grow very slowly, and there is almost no difference between them. However, if marginal and average costs rise sharply, the use of AVC can lead to serious errors at a certain optimal volume of the release. Short-term proposal of a competitive firm The firm's supply curve shows how much output the firm will produce for each possible price. At the same time, following the "golden rule", the firm strives to ensure that marginal costs remain equal to the price. If the price is below average variable costs, production will become impractical. The firm's supply curve in the short run coincides with the marginal cost curve MC, which lies above the minimum point of the average variable cost AVC, since the volumes release q 1, q 2, q 3, q 4 on give the "golden rule" at different market prices p 1, p 2, p 3, p 4. It is obvious that the increase market encourages the firm to increase production volumes products. Volumes of launch can also change q1 q2 q 3 q 4 Q diminish as a result of increase or increase in prices for resources used in production The rise in prices for at least one of the resources increases the costs of the firm. Now each unit of production costs her more, which on the graph corresponds to an upward shift of the MC curve. The “golden rule” will be observed even if the volume of issue is equal not to q 1, as before, but to q 2. Now, any volume of output exceeding q 2 will bring the firm a decrease in total profits or even losses. The curve of the industry market supply in the short run can be obtained by summing (adding) the supply curves of individual firms in the industry. Their number does not change in the short term. Selection of production volume in the long run In the long run, the firm can change all the factors of production used, including land and capital equipment. She can curtail production or switch to the release of other products. In order for a competitive firm to be in a position of long-term equilibrium, three conditions must be met (if each of them is met for all firms in the industry, we can talk about long-term equilibrium for the industry as a whole). Q opt. Q 1.
The firm should not have incentives to increase or decrease the volume of output at a given scale of the enterprise (i.e. at a given level of fixed costs). She must maximize profits. It means that MC = MR, i.e. the condition of short-term equilibrium is also a condition of long-term equilibrium. For a competitive firm, this condition is known to be simplified to MC = p. 2.
The firm does not seek to change the scale of production. For this- th min ATC = min LATC. 3.
There should be no motives for any firm to leave the industry, and new firms to enter it. To do this, all firms in the industry must receive zero economic profit. IN long-term economic profit tends to zero: p = LATC. Competitors are heading into an industry where firms are making not only business profits, but also economic profits. They increase the aggregate supply, which leads to a decrease in the equilibrium price to a level that provides only normal profit. If firms in the industry incur losses, this will lead to the opposite process: some firms will leave the industry, thereby reducing the aggregate supply, which will lead to an increase in the equilibrium price to a level that ensures normal profit. Typical firm MR = p1 MR = p2 Let's summarize the equilibrium conditions of the firm in the long run: p = MC = ATC = LATC Failure to meet any of these conditions is enough, and long-term equilibrium will be violated. 1. If p ≠ MC, the firm will change the volume of output Q, leaving the scale of the enterprise unchanged. 2. If ATS ≠ LATS, the firm, on the contrary, will change the scale of the enterprise. 3. If p< LАТС,
фирмы станут покидать отрасль, а если p> LATS, this will attract new firms to the industry. As a result of achieving equilibrium, each firm develops an equilibrium in the industry market. It can be violated due to internal and external circumstances. The former include the change in various parameters of the activities of individual firms in the industry, primarily their costs. A firm with costs lower than most competitors in the industry makes an economic profit. If the reason for the lower costs is owning a patent or a new idea, other firms in the industry will be willing to pay to use that idea or to own a patent. Now the firm that owns the patent and has the ability to sell the right to use it must include its price in its opportunity cost, which will reduce its economic profit to zero. The firm, whose costs are higher than those of competitors, inevitably loses in the price competition characteristic of the type of market under consideration. Any firm, responding to changes in external conditions, is in a state of constant search, dynamics, development. Competitive markets have two main objectives: 1.
Firms produce products that are preferred by consumers. 2.
Production is carried out in such a way that the costs for society are minimal. Long-term equilibrium in a competitive market occurs when the price p and marginal revenue MR are equal to min ATC of the firm, which means that with a given level of technology and technology, firms produce the maximum possible amount of products with minimal (for themselves, and therefore for society) costs. That is why perfect competition is considered to become the standard of efficiency. Are there such markets in reality? Of course, the absolute fulfillment of all market conditions of perfect competition is practically unrealistic. It is especially difficult to imagine the complete identity of all products for buyers. At the same time, in developed countries there are markets that more or less resemble this particular type of market. So, most agricultural markets in developed countries very much like markets of perfect competition. Indeed, none of the thousands of farmers who grow wheat, and even more so, none of the buyers can somehow influence its price. The world copper market has several dozen major suppliers. A similar picture is observed in many markets for mineral and natural raw materials (coal, iron, tin, lumber, etc.). By the way, all these products are typical. commodities, and the commodity exchange with its information openness and strict standardization of goods can be considered as the maximum approximation to the market of perfect competition. There are quite a few markets that are close to competitive: the demand curves for them are very elastic, and it is relatively easy to get in and out of a business. In such markets, firms strive to achieve a production volume at which the marginal cost of MC is close to the price p. Note that the presence of a large number of sellers (and buyers) is completely insufficient for the market to be recognized as ideally competitive, since this does not exclude the possibility of collusion between them. Of course, violence or the threat of violence against the subjects of market relations is also incompatible with free, perfect competition. It is also possible that a firm, even being the only one in a given market, behaves not as a monopolist, but as a competitive firm. Here, one should take into account the influence of competition not only within a given market, but also for the market itself (for the sphere of profitable capital investment). The nature of the market may turn out to be such that the MED (minimum effective size of the firm) can be equal to the size of the market itself, i.e. the market is too small even for two firms, and only one of them can operate profitably on it. If there are no economic barriers to entry and exit to this market in the form of additional costs, then the firm operating in the market, even being the only one, is under competitive pressure. A similar market is sometimes called competitive... An example (typical for developed countries) is the market for local flights between, say, two small cities. The demand for these flights is limited and one firm is more than enough to satisfy it, while the emergence of a second firm will lead to the fact that flights will be operated with many empty seats. But it is not difficult for the company to transfer the aircraft it has from one flight to another, because this requires almost no additional costs. This also applies to potential competitors, i.e. to airlines serving other flights, and to the company itself operating in this market. It is especially important that here the bottom which are irreversible (sunk) costs, manifest the companies that leave the given market (or the given business). It is the presence of these costs that leads to the fact that markets turn from competitive to monopoly, and a firm operating in such a market gains an advantage over potential competitors. If a new firm must incur costs in order to enter the industry that it will not be able to recover upon exiting the industry (i.e. sunk costs), then it will be forced to set a price that will cover these costs, while the existing firm no longer has such costs (they were made in the past) and she can charge a lower price, which provides her not only a profit, but also a competitive advantage. The perfect competition market model is based on four basic conditions (Figure 7.1). Let's consider them sequentially. For competition to be perfect, the goods offered by firms must meet the condition of product homogeneity. This means that the products of firms in the minds of buyers are homogeneous and indistinguishable, i.e. products of different enterprises are completely interchangeable1 (they are full substitute goods). Under these conditions, no buyer would be willing to pay a hypothetical firm more than he would pay its competitors. After all, the goods are the same, buyers do not care which company to buy them from, and they, of course, opt for the cheapest. That is, the condition of product homogeneity actually means that price differences are the only reason why a buyer may prefer one seller over another. NS
Small size and the multiplicity market actors 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 surpluses or deficits. The aggregate size of supply and demand simply "does not notice" such small changes. So, if one of the countless beer stalls in Moscow closes, the capital's beer market will not become one iota more in short supply, just as there will be no surpluses of a drink beloved by the people if one more “dot” appears in addition to the existing ones. These restrictions (homogeneity of products, the large number and small size of the enterprise) actually predetermine that, with perfect competition, market participants are not able to influence prices. WITH
Inability to dictate the price to the market Market subjects in conditions of perfect competition can influence the general situation only when they act in agreement. That is, when some external conditions induce all sellers (or all buyers) of the industry to make the same decisions. In 1998, the Russians experienced this for themselves, when in the first days after the devaluation of the ruble, all grocery stores, without saying a word, but understanding the situation in the same way, together began to overstate prices for goods of the "crisis" assortment - sugar, salt, flour, etc. Although the price increase was not economically justified (these goods rose in price much more than the ruble depreciated), sellers managed to impose their will on the market precisely as a result of the unity of their position. And this is not a special case. The difference in the consequences of changes in supply (or demand) by one firm and the entire industry as a whole plays in the functioning of the market of perfect competition big role. WITH
No barriers Nowadays, similar processes are taking place in criminalized areas of business, which, alas, can be observed in many markets in large cities in Russia. All sellers follow well-known informal rules (in particular, they keep prices at least a certain level). Any outsider who decides to bring down prices and just trade "without permission" has to deal with bandits. And when, say, the Moscow government sends disguised workers to the market to sell cheap fruits police officers (the goal is to force the criminal "owners" of the market to prove themselves, and then arrest them), then it fights specifically for the elimination of barriers to entry into the market. On the contrary, the absence of barriers, typical of perfect competition, or the freedom to enter the market (in the industry) and for the time being to give it means that resources are completely mobile and easily move from one type of activity to another. Buyers freely change their preferences when choosing products, and sellers easily switch production to more profitable products. There are no difficulties with the termination of operations on the market. The terms do not force anyone to stay in the industry unless it is in their best interest to do so. In other words, the absence of barriers means absolute flexibility and adaptability of the market for perfect competition. NS
Perfect information 7.1.2. The Significance of the Perfect Competition Model IN
Abstractness perfect competition concepts NS
The value of the concept of perfect competition 1. The model of a completely competitive market makes it possible to judge the principles of functioning of very many small firms, about providing standardized homogeneous products, and, therefore, operating in an environment close to perfect competition. 2. It is of great methodological importance, since it allows - albeit at the cost of great simplifications of the real market picture - to understand the logic of the firm's actions. This technique, by the way, is typical for many sciences. So, in physics, a number of concepts are used (ideal gas, absolutely black body, ideal engine), built on assumptions (absence of friction, heat losses, etc.), which are never fully implemented in the real world, but serve as convenient models for his description. The methodological value of the concept of perfect competition will be fully revealed in the future (see topics 8, 9 and 10), when considering the markets of monopolistic competition, oligopoly and monopoly, which are widespread in the real economy. Now it is advisable to dwell on the practical significance of the theory of perfect competition. What conditions can be considered close to a perfectly competitive market? Generally speaking, this question can be answered in different ways. We will approach it from the perspective of a firm, that is, we will find out in which cases a firm acts in practice as (or almost so) as if it was surrounded by a market of perfect competition. R
perfect competition criteria Obviously, in such conditions, the demand curve for the firm's products will look like a horizontal line (Fig. 7.2). Whether the firm produces 10 units of output, 20 or 1, the market will absorb them at the same price P. From an economic point of view, the price line parallel to the abscissa indicates the absolute elasticity of demand. In the event of an infinitely small decrease in price, the firm could expand its sales indefinitely. With an infinitesimal increase, the sales price of the enterprise would be reduced to zero. 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 on the market, the company begins behave like (or almost like) a perfect competitor. Indeed, the fulfillment of the criterion of perfect competition sets many conditions for the firm for its activity in the market, in particular, it determines the patterns of income generation. D
Medium, extreme and total income A direct consequence of the fulfillment of the criterion of perfect competition is that the average income for any volume of output is equal to the same value - the price of the goods, and that the marginal income is always at the same level. So, if the market price of a loaf of bread is 3 rubles, then the bread stall acting as a perfect competitor accepts it regardless of the volume of sales (the criterion of perfect competition is met). Both 100 and 1000 loaves will be sold at the same price each. Under these conditions, each additionally sold loaf will bring the stall 3 rubles. (marginal income). And the same amount of revenue will be on average for each sold loaf (average income). Thus, equality is established between average income, marginal income and price (AR = MR = P). Therefore, the demand curve for the products of an individual enterprise in conditions of perfect competition is both the curve of its average and marginal revenue. As for the total income (total revenue) of the enterprise, it changes in proportion to the change in output And in the same direction (see fig. 7.2). That is, there is a direct, linear relationship: If the stall in our example sold 100 loaves of 3 rubles each, then its proceeds, of course, will amount to 300 rubles. Graphically, the curve of total (gross) income is a ray drawn through the origin with a slope: tga = ∆TR / ∆Q = MR = P. That is, the slope of the gross income curve is equal to marginal income, which in turn is equal to the market price of the product sold by the competitive firm. From this, in particular, it follows that the higher the price, the steeper the straight line of gross income will go up. Have
Small business and perfect competition The fact is that most of the new businessmen started their business literally from scratch: no one had large capital in the USSR. Therefore, small business has embraced even those areas that are controlled by big capital in other countries. Small firms do not play a prominent role in export-import operations anywhere in the world. In our country, many categories of consumer goods are imported mainly by millions of shuttles, i.e. not even just small, but the smallest enterprises. Likewise, only in Russia, construction for private individuals and renovation of apartments are actively engaged in "wild" brigades - the smallest firms, often operating without any registration. “Small wholesale trade” is also a specifically Russian phenomenon - this term is even difficult to translate into many languages. In German, for example, wholesale is called "large-scale shopping" - Grosshandel, since it is usually carried out on a large scale. Therefore, the Russian phrase "small wholesale trade" is often conveyed by German newspapers by the absurd-sounding term "small-scale trade". Shuttle traders selling Chinese sneakers; and studio, photography, hairdressing; sellers offering the same brands of cigarettes and vodka at metro stations, and car repair shops; typists and translators; apartment renovation specialists and peasants selling on collective farm markets - all of them are united by the approximate similarity of the offered product, negligible in comparison with the size of the market, the scale of business, the large number of sellers, that is, many of the conditions of perfect competition. Obligatory, for them and the need to accept the prevailing price on the market. The criterion of perfect competition in the sphere of small business in Russia is met quite often. In general, albeit with some exaggeration, Russia can be called a reserve country of perfect competition. In any case, conditions close to it exist in many sectors of the economy, where new private business (and not privatized enterprises) prevails. THE MARKET OF PERFECT COMPETITION Each branch of the economy can act in a specific market structure. It characterizes the conditions in which competition takes place. These conditions can be free, when none of the market participants can influence its conjuncture, and not free. In the latter case, some enterprises control a large share (part) of the market for the production and sale of a certain product and therefore can dictate their terms to it. In accordance with this, distinguish two types of markets: perfect and imperfect competition. Perfect competition develops in a market where none of the participants can influence the market price and the volume of supply and demand. Competition among manufacturers in this market (on the supply side) is called polypoly, which means "many sellers", and the competition between buyers (from the demand side) - polypsony, that is, "many buyers". The market of perfect competition is characterized by the following main features: - unlimited number of independent sellers and buyers a product of a competitive industry (several hundred or thousands), with each seller having a limited market share; - absolute product uniformity means that the goods offered for sale have the same standard properties in terms of quality, packaging and appearance; - absolutely free access to the market new enterprises and free exit of existing companies; - absolute mobility, that is, the freedom to move all factors of production, the ability to get rid of excess resources or attract additional factors; - full overview (transparency) of the market means that sellers and buyers are informed about prices, quality of goods, volumes of their supply and demand, that is, they make decisions in conditions of certainty; - competitive conditions are the same for all market participants, competition should not be allowed to create advantages for someone arising from friendship or differences in the delivery time of goods. In a perfect market, sellers and buyers meet not only in the same place, but also at the same time, so that each of them can react without delay to all changes in the market. A striking example of such a market is the commodity, currency and stock exchange. The price of a specific product in the market of a perfect structure is set depending on supply and demand. Each individual seller and buyer cannot directly influence her. For example, if the seller asks for a high price, all buyers go to his competitors, but if the seller asks for a lower price, then the main demand will be focused on him, which he is not able to satisfy due to the insignificant market share. Therefore, the seller adapts to the market by regulating the volume of sales. He determines the quantity he intends to sell at a given price. It is still possible to change the price if all sellers act together. The demand in this market is quite stable, that is, there are no sharp fluctuations in demand. Buyers do not care from which manufacturer to buy the product, since it is standard. It turns out that both sellers and buyers have no choice at what price to sell or buy a product. They can only do this at the prevailing market price. The market of perfect (pure, free, ideal) competition is a favorite marketplace for economists to study the behavior of producers and consumers. Although this market is a theoretical model, it is of great practical importance, since it can explain the real situation in markets that are close to perfect competition. Economists include the markets for securities, currency, branded gasoline, wheat, corn, milk and meat, cotton and wool, vegetables and fruits. Many economic theories, in particular supply and demand, are built in relation to the market of perfect competition. In addition, it is a benchmark, a benchmark for comparison with other markets. An offer in perfect competition.
Suppose we are faced with a market in which perfect competition reigns. Perfect market competition is defined by two main characteristics: All products offered by sellers are approximately the same. There are so many buyers and sellers that no buyer or seller can influence the market price. Since, in perfect competition, buyers and sellers must accept the market price as given, they are called price takers. In real life, markets such as the stock market, foreign exchange market, wheat market, when thousands of farmers sell grain, and millions of buyers consume wheat and wheat products, perfectly fit the definition of perfect competition. No buyer or seller influences the price of wheat, everyone takes it for granted. In reality, perfect competition is quite rare, and only a few of the markets come close to it. Not only the area of practical application of our knowledge (in these markets) was of significant importance, but also the fact that perfect competition is the simplest situation and provides an initial, reference model for comparing and assessing the effectiveness of real economic processes. Of course, within a short period of time in a perfectly competitive environment, a firm can make excess profits or incur losses. However, for a long period of time, such a premise is unrealistic, since in the conditions of free entry and exit from the industry, too high profits attract other firms to this industry, and unprofitable firms go bankrupt and leave the industry. Perfect competition helps to allocate limited resources in such a way as to maximize the satisfaction of demand. This is ensured when P = MC. This provision means that firms will produce the maximum possible amount of output until the marginal cost of the resource is equal to the price at which it was bought. At the same time, not only high efficiency of resource allocation is achieved, but also maximum production efficiency. Perfect competition forces firms to produce products at the lowest average cost and sell them for a price that matches those costs. Graphically, this means that the average cost curve only touches the demand curve. If the cost of producing a unit of output were higher than the price (AC> P), then any product would be economically unprofitable, and firms would be forced to leave this industry. If average costs were below the demand curve and, accordingly, prices (AC< Р), это
означало бы, что кривая средних издержек
пересекала кривую спроса и образовался
некий объем производства, приносящий
сверхприбыль. Приток новых фирм рано
или поздно свел бы эту прибыль на нет.
Таким образом, кривые только касаются
друг друга, что и создает ситуацию
длительного равновесия: ни прибыли, ни
убытков. There are three periods of supply elasticity: short-term, medium-term and long-term. In the short term, the firm is unable to change the volume of output and is forced to adjust to demand, changing only the price. In the medium term, the enterprise can increase the volume of production, using the nearest reserves, available stocks and the intensification of labor. In the long term, it is possible to restructure production, replace old equipment with new technically advanced capacities. In the long term, the elasticity of supply reaches its maximum value, in the short term it is absolutely inelastic. Test questions. In topic 7, pay attention to the connection with the theory of the following topical problems of the Russian economy: Supply and demand - two factors that give life to the market as a meeting place, form the level of prices for goods and services in the economy. By defining the curves of costs and benefits, they create the external environment for the existence of the firm. The behavior of the firm itself, its choice of production volumes, which means that the size of demand for resources and the amount of supply of its own goods depend on the type of market in which it operates. competition The most powerful factor dictating the general conditions for the functioning of a particular market is the degree of development of competitive relations on it. Etymologically the word competition goes back to Latin concurrentia meaning collision, competition. Market competition is the struggle for limited consumer demand between firms in the parts (segments) of the market available to them. As already noted (see 2.2.2), competition performs in a market economy the most important function of a counterbalance and, at the same time, a supplement to the individualism of market participants. It forces them to take into account the interests of the consumer, and hence the interests of society as a whole. Indeed, in the course of competition, the market selects from a variety of products only those that are needed by consumers. They are the ones who manage to sell. Others remain unclaimed, and their production ceases. In other words, outside the competitive environment, an individual satisfies his own interests, regardless of others. In a competitive environment, the only way to realize one's own interest is to take into account the interests of others. Competition is a specific mechanism by which the market economy solves fundamental issues. what? as? for whom to produce 2 The development of competitive relations is closely related to the splitting of economic power. When it is absent, the consumer is deprived of a choice and is forced to either fully agree to the conditions dictated by the manufacturer, or completely remain without the benefit he needs. On the contrary, when economic power is split and the consumer deals with many suppliers of similar goods, he can choose the one that best suits his needs and financial capabilities. Competition and types of markets According to the degree of development of competition, economic theory identifies the following main types of the market: In the market of perfect competition, the splitting of economic power is maximized and the mechanisms of competition are working in full force. There are many producers operating here, devoid of any leverage to impose their will on consumers. With imperfect competition, the splitting of economic power is weakened or absent altogether. Therefore, the manufacturer acquires a certain degree of influence on the market. The degree of market imperfection depends on the type of imperfect competition. In conditions of monopolistic competition, it is small and is associated only with the manufacturer's ability to produce special, different from competitive varieties of goods. Under an oligopoly, the imperfection of the market is significant and is dictated by the small number of firms operating in it. Finally, monopoly means dominance of the market by only one manufacturer. 7.1.1. Perfect Competition Conditions The perfect competition market model is based on four basic conditions (Figure 7.1). Let's consider them sequentially. Rice. 7.1. For competition to be perfect, the goods offered by firms must meet the condition of product homogeneity. This means that the products of firms in the minds of buyers are homogeneous and indistinguishable, i.e. products of different enterprises are completely interchangeable (they are full substitute goods). Uniformity products Under these conditions, no buyer would be willing to pay a hypothetical firm more than he would pay its competitors. After all, the goods are the same, buyers do not care which company to buy them from, and they, of course, opt for the cheapest. That is, the condition of product homogeneity actually means that price differences are the only reason why a buyer may prefer one seller over another. Small size and large number of market players With perfect competition, neither sellers nor buyers influence the market situation due to the smallness and multiplicity of all market participants. Sometimes both of these sides of perfect competition are united, speaking of the atomistic structure of the market. This means that there are a large number of small sellers and buyers in the market, just as any drop of water is made up of a gigantic number of tiny atoms. At the same time, purchases made by the consumer (or sales by the seller) are so small 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. The aggregate size of supply and demand simply "does not notice" such small changes. So, if one of the innumerable beer stalls in Moscow closes, the capital's beer market will not become one iota more in short supply, just as there will be no surpluses of a drink beloved by the people if one more “dot” appears in addition to the existing ones. Inability to dictate the price to the market These restrictions (homogeneity of products, the large number and small size of enterprises) actually predetermine that in perfect competition, market actors are unable to influence prices. It is ridiculous to believe, say, that one seller of potatoes on the "collective farm" market will be able to impose on buyers a higher price for his product if other conditions of perfect competition are met. Namely, if there are many sellers and their potatoes are exactly the same. Therefore, it is often said that in perfect competition, each individual selling firm “gets a price,” or is a price-taker. Market subjects in conditions of perfect competition can influence the general situation only when they act in agreement. That is, when some external conditions induce all sellers (or all buyers) of the industry to make the same decisions. In 1998, Russians experienced this for themselves, when, in the first days after the devaluation of the ruble, all grocery stores, without saying a word, but understanding the situation in the same way, together began to overstate prices for goods of the “crisis” assortment - sugar, salt, flour, etc. Although the increase in prices was not economically justified (these goods rose in price much more than the ruble depreciated), sellers managed to impose their will on the market precisely as a result of the unity of their position. And this is not a special case. The difference in the consequences of changes in supply (or demand) by one firm and the entire industry as a whole plays an important role in the functioning of the market of perfect competition. No barriers The next condition for perfect police officers (the goal is to force the criminal "owners" of the market to prove themselves, and then arrest them), then it is fighting for the elimination of barriers to entry into the market. On the contrary, typical of perfect competition no barriers or freedom to enter to the market (to the industry) and leave it means that resources are completely mobile and move without problems from one activity to another. Buyers freely change their preferences when choosing products, and sellers easily switch production to produce more profitable products. There are no difficulties with the termination of operations on the market. Conditions do not force anyone to stay in the industry if it is not in their interests. In other words, the absence of barriers means absolute flexibility and adaptability of the market of perfect competition. Perfect information The last condition for the existence of a market of perfect competition is providing standardized homogeneous products, and, therefore, operating in conditions close to perfect competition. 2. It is of great methodological importance, since it allows - albeit at the cost of great simplifications of the real market picture - to understand the logic of the firm's actions. This technique, by the way, is typical for many sciences. So, in physics, a number of concepts are used ( perfect gas, absolutely black body, perfect engine) based on the assumptions (no friction, heat loss, etc.), which are never fully performed in the real world, but serve as convenient models for describing it. The methodological value of the concept of perfect competition will be fully revealed in the future (see topics 8, 9 and 10), when considering the markets of monopolistic competition, oligopoly and monopoly, which are widespread in the real economy. Now it is advisable to dwell on the practical significance of the theory of perfect competition. What conditions can be considered close to a perfectly competitive market? Generally speaking, this question can be answered in different ways. We will approach it from the perspective of a firm, that is, we will find out in which cases a firm acts in practice as (or almost so) as if it was surrounded by a market of perfect competition. Criterion perfect competition Let's figure out, first, how the demand curve for the products of a firm operating in perfect competition should look like. Recall, first, that the firm accepts the market price, that is, the latter is a given value for it. Secondly, the firm acts on the market with a very small part of the total amount of goods produced and sold by the industry. Consequently, the volume of its production will not affect the market situation in any way, and this set price level will not change with an increase or decrease in output. Obviously, in such conditions, the demand curve for the firm's products will look like a horizontal line (Fig. 7.2). Whether the firm releases 10 units, 20 or 1, the market will absorb them at the same price P. From an economic point of view, the price line parallel to the abscissa indicates the absolute elasticity of demand. In the event of an infinitely small decrease in price, the firm could expand its sales indefinitely. With an infinitesimal increase, the sales price of the enterprise would be reduced to zero. 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 on the market, the company begins Rice. 7.2. Demand and Total Income Curves for an Individual Firm in Perfect Competition behave like (or almost like) a perfect competitor. Indeed, the fulfillment of the criterion of perfect competition sets many conditions for the firm for its activities in the market, in particular, it determines the patterns of income generation. Average, marginal and total income of the firm Income (revenue) of a firm is called payments received in its favor when selling products. Like many other indicators, economics calculates income in three varieties. Total income(TR) call the entire amount of revenue that the firm receives. Average income(AR) reflects revenue per unit of product sold, or (which is the same) total revenue divided by the number of products sold. Finally, marginal income(MR) represents the additional income earned from the sale of the last unit sold. A direct consequence of the fulfillment of the criterion of perfect competition is that the average income for any volume of output is equal to the same value - the price of the goods, and that the marginal income is always at the same level. So, if the market price of a loaf of bread equals 3 rubles, then the bread stall acting as a perfect competitor accepts it regardless of the volume of sales (the criterion of perfect competition is met). Both 100 and 1000 loaves will be sold at the same price each. Under these conditions, each additionally sold loaf will bring the stall 3 rubles. (marginal income). And the same amount of revenue will be on average for each sold loaf (average income). Thus, equality is established between average income, marginal income and price (AR = MR = P). Therefore, the demand curve for the products of an individual enterprise in conditions of perfect competition is both the curve of its average and marginal revenue. As for the total income (total revenue) of the enterprise, it changes in proportion to the change in output and in the same direction (see Fig. 7.2). That is, there is a direct, linear relationship: If the stall in our example sold 100 loaves of 3 rubles each, then its proceeds, of course, will amount to 300 rubles. Graphically, the curve of total (gross) income is a ray drawn through the origin with a slope: That is, the slope of the gross income curve is equal to the marginal income, which in turn is equal to the market price of the product sold by the competitive firm. From this, in particular, it follows that the higher the price, the steeper the straight line of gross income will go up. Small business in Russia and perfect competition The simplest example of the bread trade that we have already cited, which is constantly encountered in everyday life, suggests that the theory of perfect competition is not so far from Russian reality as one might think. The fact is that most of the new businessmen started their business literally from scratch: no one had large capital in the USSR. Therefore, small business has embraced even those areas that are controlled by big capital in other countries. Small firms do not play a prominent role in export-import operations anywhere in the world. In our country, many categories of consumer goods are imported mainly by millions of shuttles, i.e. not even just small, but the smallest enterprises. Likewise, only in Russia, construction for individuals and renovation of apartments are actively engaged in "wild" brigades - the smallest firms, often operating without any registration. “Small wholesale trade” is also a specifically Russian phenomenon - this term is even difficult to translate into many languages. In German, for example, wholesale is called "large-scale shopping" - Grosshandel, since it is usually carried out on a large scale. Therefore, the Russian phrase "small wholesale trade" is often conveyed by German newspapers by the absurd-sounding term "small-scale trade". Shuttle traders selling Chinese sneakers; and studio, photography, hairdressing; sellers offering the same brands of cigarettes and vodka at metro stations, and car repair shops; typists and translators; apartment renovation specialists and peasants selling on collective farm markets - all of them are united by the approximate similarity of the offered product, negligible in comparison with the size of the market, the scale of business, the large number of sellers, that is, many of the conditions of perfect competition. Obligatory for them and the need to accept the prevailing market price. The criterion of perfect competition in the sphere of small business in Russia is met quite often. In general, albeit with some exaggeration, Russia can be called a reserve country of perfect competition. In any case, conditions close to it exist in many sectors of the economy, where new private business (and not privatized enterprises) prevails. The manual is given on the website in an abridged version. In this version, testing is not given, only selected tasks and quality tasks are given, theoretical materials are cut by 30% -50%. I use the full version of the manual in the classroom with my students. The content contained in this manual is subject to copyright. Attempts to copy and use it without specifying links to the author will be prosecuted in accordance with the legislation of the Russian Federation and the policy of search engines (see the provisions on the copyright policy of Yandex and Google). We have already defined that the market is a set of rules, using which buyers and sellers can interact with each other and carry out transactions (transactions). Over the history of the development of economic relations between people, markets are constantly undergoing transformation. For example, 20 years ago there was no such abundance of electronic markets that are available to consumers now. Consumers could not buy a book, home appliances, or shoes by simply opening the website of an online store and making a few clicks. At the time when Adam Smith began to speculate about the nature of markets, they were arranged in something like this: most of the goods consumed in European economies were produced by many manufactories and artisans, who used mainly manual labor. The firm was very limited in size and employed a maximum of several dozen employees, and most often 3-4 employees. At the same time, there were a lot of such manufactures and artisans, and the producers are fairly homogeneous goods. The variety of brands and types of goods that we are accustomed to in the modern consumer society did not exist then. These features led Smith to conclude that neither consumers nor producers have bargaining power, and prices are set freely through the interaction of thousands of buyers and sellers. Observing the features of markets in the late 18th century, Smith concluded that buyers and sellers were guided toward equilibrium by an invisible hand. The characteristics that were inherent in the markets at the time, Smith summarized in the term "Perfect competition"
.
A perfectly competitive market is a market with many small buyers and sellers selling a similar product in an environment where buyers and sellers have the same information about the product and each other. We have already discussed the main conclusion of Smith's “invisible hand” hypothesis - a completely competitive market is able to ensure efficient allocation of resources (when a product is sold at prices that exactly reflect the marginal costs of a firm for its production). Once upon a time, most markets really looked like perfect competition, but in the late 19th and early 20th centuries, when the world became industrial, and in a number of industrial sectors (coal mining, steel production, railway construction, banking), monopolies formed, it became clear that the model of perfect competition is no longer suitable for describing the real state of affairs. Modern market structures are far from the characteristics of perfect competition; therefore, perfect competition is currently an ideal economic model (like an ideal gas in physics), which is unattainable in reality due to numerous frictional forces. The ideal model of perfect competition has the following characteristics: If these conditions are met, the market is able to allocate resources and benefits efficiently. The criterion for the effectiveness of a competitive market is the equality of prices and marginal costs. Why does resource allocation efficiency arise when prices are equal to marginal costs and is lost when prices are not equal to marginal costs? What is market efficiency and how is it achieved? To answer this question, it suffices to consider a simple model. Consider potato production in an economy of 100 farmers whose marginal cost of potato production is an increasing function. The first kilogram of potatoes costs $ 1, the second kilogram of potatoes costs $ 2, and so on. None of the farmers have such differences in production function that would allow them to gain a competitive advantage over the rest. In other words, none of the farmers has market power. All potatoes sold by farmers can be sold at the same price determined in the market for balances of total demand and total supply. Consider two farmers: farmer Ivan produces 10 kilograms of potatoes per day at a marginal cost of $ 10, and farmer Mikhail produces 20 kilograms at a marginal cost of $ 20. If the market price is $ 15 per kilogram, then Ivan has incentives to increase potato production, because each additional product and sold kilogram brings him an increase in profit as long as his marginal cost does not exceed 15. For similar reasons, Mikhail has incentives to reduction in production volumes. Now imagine the following situation: Ivan, Mikhail, and other farmers initially produce 10 kilograms of potatoes, which they can sell at 15 rubles per kilogram. In this case, each of them has an incentive to produce more potatoes, and the current situation will be attractive for the arrival of new farmers. Although each of the farmers has no influence on the market price, their joint efforts will bring the market price down to the point where the opportunities for additional profit for all and for everyone are exhausted. Thus, thanks to the competition of many players in conditions of complete information and a homogeneous product, the consumer receives the product at the lowest possible price - at a price that only breaks the manufacturer's marginal costs, but does not exceed them. Now let's see how the equilibrium is established in the market of perfect competition in graphical models. The equilibrium market price is established in the market as a result of the interaction of supply and demand. The firm takes the given market price as the target price. The firm knows that at this price it will be able to sell as many goods as it wants, so there is no point in reducing the price. If a firm raises the price of a product, then it will not be able to sell anything at all. Under these conditions, the demand for the products of one firm becomes absolutely elastic: The firm takes the market price as given, i.e. P = const.
Under these conditions, the firm's revenue graph looks like a ray emerging from the origin: This is easy to prove: MR = TR Q ′ = (P * Q) Q ′
Because the P = const, P can be taken out of the sign of the derivative. As a result, it turns out MR = (P * Q) Q ′ = P * Q Q ′ = P * 1 = P
MR is the tangent of the slope of the straight line TR.
A firm in perfect competition, like any firm in any market structure, maximizes overall profits. A necessary (but not a sufficient condition) for maximizing the firm's profit is the zero derivative of the profit. р Q ′ = (TR-TC) Q ′ = TR Q ′ - TC Q ′ = MR - MC = 0
Or MR = MC
I.e MR = MC is another notation of the condition profit Q ′ = 0. This condition is necessary, but not sufficient for finding the maximum profit point. At the point where the derivative is zero, there may be a minimum profit along with a maximum.
A sufficient condition for maximizing the firm's profit is observing the neighborhood of the point where the derivative is zero: to the left of this point, the derivative must be greater than zero, and to the right of this point, the derivative must be less than zero. In this case, the derivative changes its sign from plus to minus, and we get the maximum, not the minimum, of profit. If in this way we have found several local maximums, then to find the global maximum profit, we should simply compare them with each other and choose the maximum profit value. For perfect competition, the simplest profit maximization case looks like this: We will graphically consider more complex cases of maximizing profits in the appendix in the chapter. We realized that a necessary (but not sufficient) condition for maximizing the firm's profit is the equality P = MC.
This means that when MC is an increasing function, then in order to maximize profits, the firm will choose points lying on the MC curve. But there are situations where it is profitable for a firm to leave the industry instead of producing at the point of maximum profit. This happens when the firm, being at the point of maximum profit, cannot cover its variable costs. In this, the firm incurs losses that exceed the fixed costs. Thus, the firm will remain at the point of maximum profit, and not leave the market when its revenue exceeds variable costs, or, which is the same thing, when its price exceeds average variable costs. P> AVC
Let's take a look at the chart below: Of the five designated points at which P = MC, the firm will remain on the market only at points 2,3,4. At points 0 and 1, the firm will choose to leave the industry. If we consider all possible options for the location of the line P, then we see that the firm will choose points lying on the marginal cost curve that will be higher than AVC min.
Thus, the supply curve of a competitive firm can be plotted as part of the MC above AVC min.
This rule only applies when the MC and AVC curves are parabolas.... Consider the case where MC and AVC are straight lines. In this case, the total cost function is a quadratic function: TC = aQ 2 + bQ + FC
Then MC = TC Q ′ = (aQ 2 + bQ + FC) Q ′ = 2aQ + b
We get the following graph for MC and AVC: As you can see from the graph, when Q> 0, the MC graph always lies above the AVC graph (since the MC line has a slope 2a, and straight line AVC tilt angle a.
Recall that in the short run, a firm has both variable and fixed factors. This means that the costs of the firm consist of a variable and a fixed part: TC = VC (Q) + FC
The firm's profit is p = TR - TC = P * Q - AC * Q = Q (P - AC)
At the point Q * the firm reaches the maximum profit, because in it P = MC(a necessary condition), and the profit changes from an increase to a decrease (a sufficient condition). On the graph, the firm's profit is depicted as a shaded rectangle. The base of the rectangle is Q *, the height of the rectangle is (P - AC)... The area of the rectangle is Q * (P - AC) = p
That is, in this version of the equilibrium, the firm receives economic profit and continues to work in the market. In this case P> AC at the point of optimal release Q *.
Consider an equilibrium option when the firm receives zero economic profit In this case, the price at the optimum point is equal to the average cost. The firm may even generate negative economic returns and still continue to operate in the industry. This occurs when, at the optimum, price is lower than average but higher than average variable costs. The firm, even receiving an economic profit, covers variable and part of the fixed costs. If the firm leaves, then it will bear all the fixed costs, so it continues to operate in the market. Finally, a firm leaves the industry when, at the optimal volume of output, its revenue does not cover even variable costs, that is, when P< AVC
Thus, we saw that a competitive firm can make positive, zero, or negative profits in the short run. A firm leaves the industry only when, at the point of optimal release, its revenue does not cover even variable costs. The difference between the long run and the short run is that all factors of production for the firm are variable, that is, there are no fixed costs. Also, as in the short term, firms can freely enter and exit the market. Let us prove that in the long run the only stable state of the market is one in which the economic profit of each firm tends to zero. Let's consider 2 cases. Case 1
... The market price has developed so that firms receive positive economic returns. What will happen to the industry in the long term? Since information is open and publicly available, and there are no market barriers, the presence of positive economic returns from firms will attract new firms to the industry. Coming to the market, new firms shift the market supply to the right, and the equilibrium market price drops to a level at which the emerging opportunity for obtaining positive profits will not be completely exhausted. Case 2
... The market price has developed in such a way that firms receive negative economic returns. In this case, everything will happen in the opposite direction: since firms receive negative economic profits, some of the firms will leave the industry, the supply will decrease, the price will rise to a level at which the economic profits of firms will not be zero.Q 2 the firm suffers losses. At points Q 1 and Q 2, the firm's profit (economic) is zero, for Q 1
Features of a completely competitive market
11.1 Perfect competition
MR = P
11.1.2 The supply curve of a perfectly competitive firm
The optimal strategy of the firm's behavior is to exit the market, because in this case it receives losses that are exactly equal to the fixed costs.
11.1.3 Equilibrium of a perfectly competitive firm in the short run
11.1.4 Equilibrium of a Competitive Firm in the Long Run
The fastest boat in the world!
The history of the Off-White brand
Habakkuk: how the British tried to build an aircraft carrier from ice Why the project was curtailed