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11.1 Perfect Competition
We have already defined that the market is a set of rules, using which buyers and sellers can interact with each other and carry out transactions (transactions). Over the history of the development of economic relations between people, markets are constantly undergoing transformations. For example, 20 years ago there was not the abundance of electronic markets that are available to the consumer now. Consumers couldn't buy the book, household appliances or shoes, simply by opening the website of the online store and making a few clicks with the mouse.
At the time when Adam Smith began to talk about the nature of markets, they were arranged something like this: most of the goods consumed in European economies were produced by a multitude of manufactories and artisans who used mainly manual labor. The firm was very limited in size, and employed only a few dozen workers at the most, and most often 3-4 workers. At the same time, there were quite a lot of such manufactories and artisans, and they were producers of fairly homogeneous goods. The variety of brands and types of products that we are used to in modern society there was no consumption then.
These signs led Smith to conclude that neither consumers nor producers have bargaining power, and the price is set freely by the interaction of thousands of buyers and sellers. Observing the features of the markets in the late 18th century, Smith came to the conclusion that buyers and sellers are guided towards equilibrium by an "invisible hand". The characteristics that were inherent in the markets at that time, Smith summarized in the term "perfect competition" .
A perfectly competitive market is a market with many small buyers and sellers selling a homogeneous product under conditions where buyers and sellers have the same information about the product and each other. We have already discussed the main conclusion of Smith's "invisible hand" hypothesis - a perfectly competitive market is able to provide an efficient allocation of resources (when a product is sold at prices that exactly reflect the firm's marginal cost of producing it).
Once upon a time, most markets were really similar to perfect competition, but in the late 19th and early 20th centuries, when the world became industrial, and in a number of industrial sectors (coal mining, steel production, construction railways, banking) formed monopolies, it became clear that the model 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, so perfect competition is currently an ideal economic model (like an ideal gas in physics), which is unattainable in reality due to the numerous forces of friction.
The ideal model of perfect competition has the following characteristics:
- Many small and independent buyers and sellers unable to influence the market price
- Free entry and exit of firms, i.e. no barriers
- The market sells a homogeneous product that does not have qualitative differences
- Product information is open and equally available to all market participants
Under these conditions, the market is able to allocate resources and goods efficiently. The criterion for the efficiency of a competitive market is the equality of prices and marginal cost.
Why does allocative efficiency arise when prices equal marginal cost and is lost when prices do not equal marginal cost? What is market efficiency and how is it achieved?
To answer this question, it suffices to consider a simple model. Consider potato production in an economy of 100 farmers whose marginal cost of potato production is an increasing function. The 1st kilo of potatoes costs $1, the 2nd kilo of potatoes costs $2, and so on. None of the farmers has such differences in the production function that would allow him to gain a competitive advantage over the rest. In other words, none of the farmers have bargaining power. All potatoes sold by farmers can be sold at the same price, determined in the market for balances of general demand and total supply. Consider two farmers: farmer Ivan produces 10 kilograms of potatoes per day at a marginal cost of $10, and farmer Michael produces 20 kilograms at a marginal cost of $20.
If a market price equals $15 per kilogram, Ivan has an incentive to increase potato production because each additional product and kilogram sold earns him an increase in profits, as long as his marginal cost does not exceed $15. For similar reasons, Mikhail has an incentive to reduce production .
Now let's imagine the following situation: Ivan, Mikhail, and other farmers initially produce 10 kilograms of potatoes, which they can sell for 15 rubles per kilogram. In this case, each of them has incentives to produce more potatoes, and the current situation will be attractive for the arrival of new farmers. Although each of the farmers has no influence on the market price, their joint efforts will lead to a fall in the market price to a level until the opportunities for additional profit for each and every one are exhausted.
Thus, thanks to the competition of many players in conditions of complete information and a homogeneous product, the consumer receives the product at the lowest possible price - at a price that only breaks the marginal cost of the producer, but does not exceed them.
Now let's see how equilibrium is established in the perfectly competitive market in graphical models.
The equilibrium market price is established in the market as a result of the interaction of supply and demand. The firm accepts this market price as given. The firm knows that at this price it will be able to sell as many goods as it likes, so there is no point in lowering the price. If the firm raises the price of a product, it will not be able to sell anything at all. Under these conditions, the demand for the product of one firm becomes perfectly elastic:
The firm takes the market price as given, i.e. P = const.
Under these conditions, the firm's revenue schedule looks like a ray coming out of the origin:
MR=P
This is easy to prove:
MR = TR Q ′ = (P * Q) Q ′
Because the P = const, P can be taken out of the sign of the derivative. As a result, it turns out
MR = (P * Q) Q ′ = P * Q Q ′ = P * 1 = P
MR is the tangent of the slope of the straight line TR.
A perfectly competitive firm, like any other firm in any market structure maximizes total profit.
A necessary (but not sufficient condition) for maximizing the firm's profit is the zero derivative of profit.
R Q ′ = (TR-TC) Q ′ = TR Q ′ - TC Q ′ = MR - MC = 0
Or MR=MC
That is MR=MC is another entry for the profit condition Q ′ = 0.
This condition is necessary but not sufficient for finding the maximum profit point.
At the point where the derivative is equal to zero, there may be a minimum of profit along with a maximum.
A sufficient condition for maximizing the firm's profit is to observe the neighborhood of the point where the derivative is equal to zero: to the left of this point, the derivative must be greater than zero, to the right of this point, the derivative must be less than zero. In this case, the derivative changes sign from plus to minus, and we get a maximum, not a minimum, of profit. If in this way we have found several local maxima, then to find the global profit maximum, you should simply compare them with each other and choose the maximum profit value.
For perfect competition, the simplest case of profit maximization looks like this:
More complex cases of profit maximization will be discussed graphically in the appendix in the chapter.
11.1.2 The supply curve of a perfectly competitive firm
We realized that a necessary (but not sufficient) condition for maximizing the firm's profit is the equality P=MC.
This means that when MC is an increasing function, the firm will choose points on the MC curve to maximize profits.
But there are situations when it is beneficial for the firm to leave the industry, instead of producing at the point maximum profit. This happens when the firm, being at the point of maximum profit, cannot cover its variable costs. In this, the firm incurs losses that exceed fixed costs.
The firm's optimal strategy is to exit the market, because in this case it receives losses exactly equal to fixed costs.
Thus, the firm will stay at the point of maximum profit, and not leave the market when its revenue exceeds variable costs, or, equivalently, when its price exceeds average variable costs. P>AVC
Let's look at the chart below:
Of the five marked points where P=MC, the firm will remain in the market only at points 2,3,4. At points 0 and 1, the firm will choose to leave the industry.
If we consider all possible options location of the line P, we will see that the firm will choose points lying on the marginal cost curve, which will be higher than AVC min.
Thus, the competitive firm's supply curve can be plotted as the portion of MC above AVC min.
This rule is applicable only for the case when the curves MC and AVC are parabolas. Consider the case where MC and AVC are straight lines. In this case, the 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 next chart for MC and AVC:
As can be seen from the graph, when Q > 0, the MC graph always lies above the AVC graph (because the straight line MC has an angle of inclination 2a, and the straight line AVC slope angle a.
11.1.3 Short-run equilibrium of a perfectly competitive firm
Recall that in the short run, the firm necessarily has both variable and fixed factors. So, the costs of the firm consist of a variable and a fixed part:
TC = VC(Q) + FC
The firm's profit is p \u003d TR - TC \u003d P * Q - AC * Q \u003d Q (P - AC)
At the point Q* The firm achieves maximum profit because it P=MC (necessary condition), and the profit changes from increasing to decreasing (sufficient condition). On the graph, the profit of the firm is depicted as a shaded rectangle. The base of the rectangle is Q*, the height of the rectangle is (P-AC). The area of the rectangle is Q * (P - AC) = p
That is, in this variant of equilibrium, the firm receives economic profit and continues to operate in the market. In this case P > AC at the point of optimal release Q*.
Consider the equilibrium where the firm earns zero economic profit
In this case, the price at the optimum point is equal to the average cost.
A firm can earn even negative economic profits and still continue to operate in the industry. This happens when, at the point of optimum, the price is lower than the average, but higher than the average variable costs. The firm, even receiving economic profit, covers the variable and part of the fixed costs. If the firm leaves, then it will bear all the fixed costs, so it continues to operate in the market.
Finally, the firm exits the industry when, at optimal output, its revenue does not even cover variable costs, that is, when P< AVC
Thus, we have seen that a competitive firm can earn positive, zero, or negative profits in the short run. The firm leaves the industry only when, at the point of optimal output, its revenue does not even cover variable costs.
11.1.4 Equilibrium of a competitive firm in the long run
The difference between the long run and the short run is that all factors of production for the firm are variable, that is, there are no fixed costs. Just as in the short run, firms can freely enter and exit the market.
Let us prove that in the long run the only stable state of the market is one in which the economic profit of each firm tends to zero.
Let's consider 2 cases.
Case 1 . The market price is such that firms earn a positive economic profit.
What will happen to the industry in the long run?
Since information is open and publicly available, and there are no market barriers, the presence of positive economic profits for firms will attract new firms to the industry. Entering the market, new firms shift market supply to the right, and the equilibrium market price falls to a level at which the opportunity for positive profits has not been completely exhausted.
Case 2 . The market price is such that firms earn negative economic profits.
AT this case everything will happen in the opposite direction: since firms earn negative economic profit, some firms will leave the industry, supply will decrease, the price will rise to a level at which the economic profit of firms will not become zero.
Ministry of Education and Science of the Russian Federation
Federal Agency for Education
GOU VPO All-Russian Correspondence Institute of Finance and Economics
department economic theory
TEST
in the discipline "Economic theory"
using a computer tutorial
Option number 18
Teacher: ___________________________________________
Student I course:
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_______________________________________________________
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________________________________________________
(personal file no., group no.)
Penza 2010
Work plan
Introduction………………………………………………………………...3
Control theoretical question……………………………………4
Conclusion……………………………………………………………...14
Control test tasks………………………………………..15
References………………………………………………………..18
Introduction
The terms "perfect competition", "perfect market" were introduced into scientific circulation in the second half of the 19th century. Among the authors who first used the concept perfect market, refers to W. Jevons. Representatives of classical political economy, when characterizing market regulation, relied on the concept of free (unlimited) competition, emphasizing that the effect of competition is not subject to restrictions from pre-capitalist regulations that prevented the migration of capital from one industry to another.
Equilibrium of a perfectly competitive firm in the short and long run
A competitive firm can occupy a variety of positions in an industry. It depends on what its costs are in relation to the market price of the good that the firm produces. In economic theory, three general cases of the ratio of average costs are considered (AU) firm and market price (R), which determines the position of the company in the industry - receiving excess profits, normal profits, or the presence of losses (Fig. 1).
Figure 1 - Options for the position of a competitive firm in the industry: a - the firm suffers losses; b) receiving a normal profit; c) making super profits
In the first case (Fig. 1, a), we observe an unsuccessful, inefficient firm that incurs losses: its costs AC too high compared to the price of the product R market, and do not pay off. Such a firm should either modernize production and reduce costs, or leave the industry.
In the second case (Fig. 1, b) the firm achieves equality between average cost and price (AC = P) with the volume of production Q e, which characterizes the equilibrium of the firm in the industry. After all, the average cost function of a firm can be considered as a function of supply, and demand, as we remember, is a function of price. R. So equality is achieved between supply and demand, i.e., equilibrium. Volume of production Q e in this case is balanced. Being in a state of equilibrium, the firm receives only normal profit, including accounting profit, and economic profit (ie excess profit) is equal to zero. The presence of a normal profit provides the firm with a favorable position in the industry.
The absence of economic profit creates an incentive to seek competitive advantage- for example, the introduction of innovations, more advanced technologies, which can further reduce the company's costs per unit of output, temporarily provide excess profits.
The position of the firm receiving excess profits in the industry is shown in fig. one, in. In production in the amount of Q 1 up to Q 2, the firm has excess profit: income received from the sale of products at a price R, exceeds the firm's costs (AC< Р). It should be noted that the greatest profit is achieved in the production of products in the volume Q 2 . The size of the maximum profit is marked in fig. 5.4, in shaded area.
However, it is possible to more accurately determine the moment when it is necessary to stop increasing production so that profit does not turn into losses, as, for example, with an output of Q 3 . To do this, it is necessary to compare the marginal costs (MS) a firm with a market price that, for a competitive firm, is also marginal revenue ( MR ). Recall that marginal cost reflects individual production cost each subsequent unit of goods and change faster than average costs. Therefore, the firm achieves maximum profit (at MS = MR ) much sooner than the average cost equals the price of the good.
The condition for marginal cost to be equal to marginal revenue (MC = MR ) there is production optimization rule.
Compliance with this rule helps the company not only maximize profit, but also minimize loss.
So, a rationally operating firm, regardless of its position in the industry (whether it suffers losses, whether it receives normal profits or excess profits), must produce just the right amount products. This means that the entrepreneur will always stop at such a volume of output at which the cost of producing the last unit of goods (i.e. MS) coincide with the amount of income from the sale of this last unit (i.e., with MR ). In other words, the optimal level of production is determined by achieving equality between marginal cost and marginal revenue. (MS= MR ) firms. Consider this situation in Fig. 2. .
Figure 2 - The position of a competitive firm in the industry: a - determining the optimal output; b - determination of profit (loss) of a firm - a perfect competitor
On fig. 2, and we see that for this firm the equality MS - M R achieved by the production and sale of the 10th unit of output. Therefore, 10 units of goods is the optimal volume of production, since this volume of output allows you to get the maximum amount of profit, i.e. maximize profit. By producing fewer outputs, such as five units, the firm's profit would be incomplete (to the extent of only part of the shaded figure representing profit).
It is necessary to distinguish between profit from the production and sale of one unit of production (for example, the 4th or 5th) and the total, total profit. When we talk about profit maximization, we are talking about the entire profit, i.e. about receiving the total profit. Therefore, despite the fact that the maximum positive difference between MR and MC gives the production of only the 5th unit of output (Fig. 2, a), we will not stop at this number and will continue to release. We are fully interested in all products, in the production of which MS < MR , which brings profit before MS alignment and mr. Because the market price P = MR pays for the production costs of the 7th, and even the 9th unit of production, additionally bringing, albeit a small, but still profit. So why give it up? It is necessary to refuse losses, which in our example arise in the production of the 11th unit of output (Fig. 2, a). Starting from it, the balance between marginal revenue and marginal cost changes in the opposite direction: MS > MR . That is why, in order to maximize profits, i.e. to receive all profits, it is necessary to stop completely on the 10th unit of production, at which MS = MR . In this case, the possibilities for further increase in profits have been exhausted, as evidenced by this equality.
So, the considered rule of equality of marginal costs to marginal income underlies the principle of production optimization, which is used to determine optimal, the most profitable, the volume of production at any price emerging on the market.
Now we have to find out what position of the firm in the industry with the optimal output: Will the firm make a loss or make a profit? Let's turn to the second part of Fig. 2, b, where the firm - a perfect competitor - is depicted in full: the graph of the average cost function is added to the MC function AS.
Let's pay attention to what indicators are plotted on the coordinate axes when depicting a company. Not only the market price is plotted on the y-axis (vertically) R, equal to the marginal revenue under perfect competition, but also all types of costs (AC and MS) in terms of money. The abscissa (horizontally) always plots only the volume of output Q .
To determine the amount of profit (or loss), several steps must be taken.
Step one. Using the optimization rule, we determine the output Q opt , in the production of which equality is achieved MS = MR . On the graph, this occurs at the point of intersection of functions MS and MR . Having lowered the perpendicular (dashed line) from this point down to the abscissa axis, we find the desired optimal output volume. For this firm (Fig. 2, b) the equality between MS and MR achieved by the production of the 10th unit of output. Therefore, the optimal output is 10 units.
Recall that under perfect competition, a firm's marginal revenue is the same as its market price. There are many small firms in the industry, and none of them individually can influence the market price, being a price taker. Therefore, for any volume of output, the firm sells each subsequent unit of output at the same price. Accordingly, the price functions R and marginal income MR match ( MR = P), which eliminates the need to search for the optimal output price: it will always be equal to the marginal revenue from the last unit of goods.
Step two. Determine the average cost AC in the production of goods in the volume Q opt . For this, from the point Qopt , equal to 10 units, we draw a perpendicular up to the intersection with the function AU, and then from the resulting intersection point - perpendicular to the left to the y-axis, on which the value of the average cost of production of 10 units of output is plotted AC 10 . We have now learned what the average cost of producing an optimal output is.
Step three. Finally, we determine the size of the profit (or loss) of the firm. We have already found out what the average cost AC of production of a good in the volume Q opt is equal to. It remains to compare them with the price prevailing in the industry, i.e. with market price R.
We see that on the y-axis (vertical) the marked costs AC 10 less price (AC< Р). Therefore, the firm makes a profit. To determine the size of the total profit, we multiply the difference between the price and the average cost, which is the profit from one unit of production, by the volume of the entire output in the amount of Q opt .
Firm profit = (R - AC) X Qopt .
Of course, we are talking about profit, provided that P > AC. If it turns out that R< АС, it means that the company incurs losses, the size of which is calculated according to the same formula.
On fig. 2, b the profit margin is shown as a shaded rectangle. Note that in this case, the firm did not make an accounting profit, but an economic profit, or excess profit that exceeds the opportunity cost.
There is also another way to determine profit(or loss) of the firm. Recall that if the company's sales volume Q op and the market price are known R, then you can calculate the value total income:
TR = P * Qopt .
Knowing the magnitude A C and output, we can calculate the value total costs:
TC = ACxQopt .
Now it is very easy to determine the value using simple subtraction profit or loss firms:
Profit (loss) of the firm = TR - TS.
If a ( TR - TS)> 0 - the company makes a profit, and if ( TR - TS) < 0 - фирма несет убытки.
So, at the optimal output, when MS = MR ,. A competitive firm can make economic profits (surplus profits) or incur losses.
Why is it necessary to determine the optimal output volume? The fact is that if, when producing products, the company follows the rule of production optimization MS = MR , then at any (favorable or unfavorable) price prevailing in the industry, it wins.
Benefit from optimization is as follows. If the equilibrium price in the industry is higher than the average cost of a perfect competitor, then the firm maximizes profit. If the equilibrium price in the market falls below the average cost of the firm, then the rule MS = MR allows the firm to minimize its losses - minimize losses.
What happens in the industry with the company in the long run?
If the equilibrium price prevailing in the industry market is above average costs and firms make excess profits, then this stimulates the emergence of new firms in a profitable industry. The influx of new firms expands the industry offer. An increase in the supply of a good in the market leads to a decrease in the price. Falling prices “eat up” the excess profits of firms.
Continuing to fall, the market price gradually falls below the average costs of firms in the industry. Losses appear, which “drives” unprofitable firms out of the industry. Note that those firms that are not able to take measures to reduce costs leave the market. Thus, the excess supply in the industry is reduced, and in response to this, the price in the market begins to rise again.
So in the long run industry supply is changing. This happens due to an increase or decrease in the number of market participants. Prices move up and down, each time passing through a level at which R = AC. AT In this situation, firms do not incur losses, but they also do not receive excess profits. Such the long-term situation is called equilibrium.
Under conditions of equilibrium, when the demand price coincides with average cost, the firm produces according to the optimization rule at the level MR = MS, i.e. e. produces the optimal volume of products.
Thus, equilibrium is characterized by the fact that the values of all parameters of the firm coincide with each other:
AC = P = MR = MC .
Because MR perfect competitor is always equal to the market price R = MR , then equilibrium condition for a competitive firm in the industry is equality
AC = P = MS.
The position of a perfect competitor upon reaching equilibrium in the industry is shown in Fig. 3.
Figure 3 - The firm is a perfect competitor in equilibrium
On fig. 3 the price function (market demand) P for the firm's products passes through the intersection point of the functions AC and MS. Since under perfect competition the marginal revenue function MR firm coincides with the demand (or price) function, then the optimal production volume Q opt corresponds to the equality AC= P= MR = MS, which characterizes the position of the firm in equilibrium conditions(at point E). We see that the firm does not receive any economic profit or loss in the conditions of equilibrium that develops with long-term changes in the industry.
But what happens to the firm itself? long term or period? Recall that in the long run (LR - long - run period ) firm's fixed costs FC grow when its production potential grows. In the long run, the expansion of the scale of the firm with the use of appropriate technologies provides economies of scale. The essence of this effect is that the long-term average costs of LAC, having decreased after the introduction of resource-saving technologies, cease to change and, as output increases, remain at a minimum level. Once economies of scale have been exhausted, average costs begin to rise again.
What is the best size for a firm? Obviously, one at which short-run average costs reach a minimum level of long-run average costs ( LAC ). After all, as a result of long-term changes in the industry, the market price is set at a minimum LRAC . This is how the firm achieves long-run equilibrium. AT equilibrium conditions in the long run the minimum levels of short-term and long-term average costs of the firm are equal not only to each other, but also to the price prevailing in the market. The position of the firm in a state of long-term equilibrium is shown in Fig. four.
Figure 4 - The position of the firm in terms of long-term equilibrium
In the long run, the equilibrium of a competitive firm is characterized by the fact that the optimal output is achieved when the equality
P = MC = AC = LRAC .
Under these conditions, the firm finds the optimal scale of production capacity, i.e., optimizes the long-term output.
notice, that economic profits under conditions of perfect competition short term. Being in the state research institutes long term balance the firm receives only normal profit.
In this position, the average and marginal costs of the firm coincide with the equilibrium price in the industry, which has developed when the industry-wide supply and demand are equalized.
Conclusion
Competition is a necessary and determining condition for the normal functioning of market economy. But like any event
has its pros and cons. Positive features include: activation innovation process, flexible adaptation to demand, high quality products, high labor productivity, minimum costs, implementation of the principle of payment according to the quantity and quality of labor, the possibility of regulation by the state. To negative consequences- "victory" of some and "defeat" of others, difference in conditions of activity, which leads to dishonest methods, excessive exploitation natural resources, environmental violations, etc.
Competition is a determining condition for maintaining dynamism in the economy, and in conditions of competition greater national wealth is created at a lower cost for each type of product compared to a monopoly and a planned economy.
Test tasks
1. Which of the following statements are true:
a) each point on the indifference curve represents a combination of two goods;
b) each point on the budget line means a combination of two goods;
c) all points on the budget line mean the same level of utility;
Wrong. budget line ( BL ) - this is a line that graphically displays a set of goods, the acquisition of which requires the same cost.
d) the slope of the indifference curve characterizes the rate according to which one good can be replaced by another good without changing the level of utility for the consumer.
2. When making decisions about the optimal volume of production, firms first of all evaluate the dynamics of:
a) average variable costs;
b) accounting costs;
c) average fixed costs;
d) marginal cost.
This is due to the fact that the optimal level of production is characterized by the equality of marginal cost and marginal revenue.
A task
The apple market is characterized by the data presented in the table.
1. Plot supply and demand charts
2. Determine the equilibrium price.
3. What will be the situation on the market at a price of 45 rubles.
4. What will be the market situation at the price of 60 rubles?
5. If, with an increase in income, demand increased by 10 thousand kg, then what will be the new equilibrium conditions?
We build a chart.
As can be seen from the graph, the equilibrium price is 50 rubles, since at this price the quantity demanded is equal to the quantity supplied.
At a price of 45 rubles. Demand will exceed supply, and there will be a shortage in the market in the amount of:
Def \u003d D - S \u003d 50 - 20 \u003d 30 thousand kg
At a price of 60 rubles. The market will have a surplus of:
S - D \u003d 80 - 20 \u003d 6 thousand kg
If, with an increase in income, demand increases by 10 thousand kg at any price level, the demand curve will shift to the right, to position D¢. In this case, the equilibrium will shift to the right, there will be an increase in the quantity demanded and prices.
BIBLIOGRAPHY
1. Kozyrev A.V. Basics modern economy. Textbook for high schools. - M. Finance and statistics, 2009
2. Course of economic theory / Ed. M.N. Chepurina, E.N. Kiseleva. – Kirov, 2008
3. Economics: Textbook / Ed. prof. A.S. Bulatov. - M.: Economist, 2008
4. Economic theory / Ed. G.P. Zhuravleva. – M.: UNITI, 2008
5. Economic theory / Ed. I.P. Nikolaeva. - M.: Prospect, 2006
In this situation, such a feature of perfect competition comes to the fore as the freedom to enter and exit the industry, i.e., the mobility of resources.
Figure 8.5 - The behavior of a competitive firm in the long run
If, for example, p 1 >p* , then the firm makes a profit. Then additional capital rushes into this industry. The supply line in the industry is shifting from s 1 in s 2. But at p 1 the magnitude of demand in the industry is Q d1, and the value of the offer - Q s1. There is an oversupply and p e falls. Profits are shrinking, causing capital outflow from the industry.
If a p 2 >p* , then in the industry the value of demand increases to Q d2, and offers - drops to Q s2. There is a shortage and the price rises.
As a result, in the long run, the optimum of a competitive firm at point e, where MR=MC=AC, i.e., it is set at zero economic profit (which does not mean there is no accounting profit).
The situation of zero profit in the long run is determined by the condition ………………………………………………………..(8.7)
Competitive equilibrium in the long run - this is output and market price that allow firms in the industry to earn zero "economic profit"". If firms were to receive more or less, forces would be set in motion that would either raise or lower prices to the point where economic profit would again be zero. When economic profit is zero, firms have no incentive to enter or leave the industry, since they earn a profit on their inputs that is equal to what they would earn if they chose the best of all alternatives to use their own resources.
However, the following conditions must be met:
1. Firms make the best use of available resources, i.e. each firm in the short run will strive for the maximum amount of profit under the condition
2. There are no incentives for firms in other industries to enter the industry.
3. Firms in the industry do not have the opportunity to reduce average costs and profit from economies of scale, i.e. each firm produces the amount of output that corresponds to min LAC.
Supply curve in the long run Due to various scale effects, it can acquire the following types:
1. S-curve - horizontal (with constant effect of scale)
2. S-curve - descending (positive economies of scale)
3. Curve S has a classical form (negative effect of scale).
Supply analysis in the long run is very similar to supply analysis in the short run. Here the firm still faces a horizontal demand curve for its product. Also, remember that there are no fixed costs in the long run; all costs are variable. Therefore, the firm increases profits by moving up the long run marginal cost curve until LMC equals price.
Since the firm does not incur fixed costs in the long run, it will leave the industry as soon as the market price drops below the minimum of long-term average costs, i.e. as soon as the economic profit of the enterprise becomes negative. Consequently, in the long run, the supply curve of a perfectly competitive firm will coincide with the upward part of the curve lying above the long-run marginal cost curve.
The long run is characterized by the fact that the firms in the industry have enough time to expand or reduce their production capacity and, more importantly, the industry may be replenished with new firms or, conversely, their number may decrease, depending on the level of prices and the profitability of production. . If the price is initially at a level higher than the average gross cost, this will lead to the emergence of new firms in the industry. However, soon this will cause an increase in output, and to such an extent that the price will fall to the level of average gross costs. And then the danger of incurring losses will cause the outflow of firms from the industry. Then there will be a reverse trend in the movement of prices and volumes of production.
The reason for the inflow or outflow of firms from an industry is that at the moment when in this industry the price falls and the number of firms decreases, in other industries the owners of firms receive normal or supernormal profits. Free capital flows into this area, which leads to the organization of new firms. An increase or decrease in the number of firms is accompanied by an expansion or reduction in the scale of the industry, which is associated with changes in the ratio of supply and demand for products manufactured in the industry.
Long-run equilibrium is considered to be reached when three conditions are met:
The firm has no incentive to change the volume of production, i.e. observed short-term equilibrium MR = MS;
The firm is satisfied with the scale of production, since any change in them will cause an increase in average total costs, i.e. minimum short run cost equals minimum long run cost;
There are no incentives for firms to leave or enter the industry. This condition is met only when firms receive normal profits, i.e. when the price is equal to the long-term minimum average total costs.
Summarizing all three conditions, we obtain the long-run equilibrium equation for a competitive firm:
P = MR = MC = minATC
A graphical illustration of the long-term equilibrium is shown in fig. 4.6.
Fig 4.6. Equilibrium of a competitive firm in the long run.
The graph shows that at point E, all three long-term equilibrium conditions are met. If the price exceeds the minimum average total cost, firms in the industry will earn economic profits, which will attract competitors to the market. As a result, the supply will increase, and the price will fall to the equilibrium level. Conversely, if the price falls below the equilibrium, firms will earn less than normal profit, which will cause them to leave the industry. The supply will decrease and the price will rise to the equilibrium level.
Therefore, we can conclude that in conditions of perfect competition, economic profit is a temporary phenomenon.
Economists consider perfectly competitive markets to be highly efficient because, first, they achieve production efficiency at a price equal to the minimum average total cost, which means the production of goods in the least expensive way (best technology, minimum resources, low prices); secondly, there is an efficient distribution of resources, i.e. the creation of goods necessary for consumers at P = MC; and thirdly, due to the free flow of resources, competitive markets have the ability to quickly restore the efficiency of resource use in case of possible imbalances.
Perfect competition forces firms to produce products at the lowest average cost and sell it at a price corresponding to this cost. Graphically, this means that the average cost curve only touches the demand curve.
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 the industry. If average cost were below the demand curve and, accordingly, prices (AC P), then this would mean that the average cost curve crossed the demand curve and a certain amount of production would be formed that would bring excess profit. An influx of new firms would sooner or later wipe out those profits. Thus, the curves only touch each other, which creates a situation of long-term equilibrium: no profit, no loss. Let us consider this price setting mechanism in more detail, graphically examining the consequences of a change in industry demand on the equilibrium of a firm and an industry.
From fig. 11.12 we can deduce the following.
A feature of the long run is that a firm can change all the factors of production and even leave the industry, while other firms can enter it.
If the market demand for the industry's products shifts from Dx before D2 equilibrium price rises to R 2(Fig. 11.12).
Rice. 11.12.
Guided by the principle of profit maximization, firms will increase supply to q2, which would mean an increase in industry supply to Q r
Equilibrium price R 2 will be more LRAC, therefore, firms in the industry will earn economic profits. This will attract new firms to the industry, which will lead to an increase in industry supply and a downward shift of the supply curve to the right (curve S2).
If, as a result of an increase in industry supply, the equilibrium price R 3 will be less LRAC, then firms in the industry will suffer economic losses. As a result, some firms will leave the industry, which will lead to a decrease in industry supply and an upward shift of the supply curve to the left.
Price changes related to offer changes will result in a refund equilibrium price to the initial price level and the establishment of a new long-term market equilibrium with the volume of production Q4.
All firms in the industry will produce products with LRAC m)