Perfect, free or pure competition is an economic model, an idealized state of the market, when individual buyers and sellers cannot influence the price, but shape it through their input of supply and demand.

In other words, this is a type of market structure where the market behavior of sellers and buyers is to adapt to the equilibrium state of market conditions.

Characteristics of the market perfect competition (« pure competition") are:

There are many small firms operating in the market, each of which is independent of the behavior of other firms and makes any decision independently.

The share of each firm in the total supply of the industry is so small that any decision it makes to change the price will not affect the market equilibrium price. Neither firm can influence the market price through the volume of production and supply of goods.

Any firm in these conditions perceives the market price as an external factor that does not depend on its actions. The company is a price taker, therefore, it does not have its own pricing policy.

All firms in the industry produce homogeneous products. Therefore, the buyer does not care which company to buy it from.

The entry of new firms into the industry does not encounter any obstacles.

Availability of information. The costs of obtaining it and the time spent are zero.

Features of a perfectly competitive market:

1. Optimal production volume. Price equal to marginal costs means that the optimal amount of production resources is allocated for the production of a given good. Thus, under conditions of perfect competition in the long run, it is ensured economically efficient distribution factors of production between industries.

2. Equality of marginal and average costs. Once long-run equilibrium is established, all firms remaining in the industry will have the same unit costs.

The validity of this conclusion can be doubted due to the fact that some firms may use unique production factors: soils of increased fertility, especially gifted specialists, scarce samples new technology, which make it possible to produce products with lower costs of materials and working time.

3. Number of competitors. The minimum long-run average cost determines the extent to which the size of the firm increases as the scale of production expands.

IN short term the opportunities for free access of new firms to the industry are limited, but each firm is able to change the degree of utilization of production capacity. Demand for a company’s product is characterized by high elasticity, and market price formation is characterized by dynamism. This determines the possibility of several states and different behavior companies.

1). The state of the company ensures the receipt of economic profit (excess profit, that is, in excess of normal profit) and contributes to its development.

2). Break-even production state. Minimum average total cost equals marginal cost and marginal income(price). The company fully covers its production costs, receives a normal profit, but does not have economic profit, and therefore its own development opportunities.

3). The state of the company ensures the reimbursement of the entire average variable (current) costs and some of the average fixed costs.

4). The state of the company, which is called the limiting state. The company manages to stay afloat for a short time. If the market price of the product decreases further, it will cease to be competitive, since it will not be able to cover even current production costs and will be forced to leave the industry.

The concept of perfect competition

Perfect competition, examples of which are given in the article, is the exact opposite of monopoly. That is, this is the market in which the unlimited amount sellers who deal in the same or similar goods and cannot influence its price.

At the same time, the state should not influence the market or engage in its full regulation, since this can affect the number of sellers, as well as the volume of products on the market, which is immediately reflected in the price per unit of goods.

Despite the seemingly ideal conditions for doing business, many experts are inclined to believe that, in real conditions, perfect competition will not be able to exist in the market for long. Examples that confirm their words have happened repeatedly in history. The end result was that the market became either an oligopoly or some other form of imperfect competition.

may lead to decline

This is due to the fact that prices are constantly decreasing. And if the human resource in the world is large, then the technological one is very limited. And sooner or later, enterprises will move to the point where all fixed assets and everything will be modernized production processes, and the price will still fall due to competitors’ attempts to conquer a larger market.

And this will already lead to functioning on the verge of the break-even point or below it. The situation can only be saved by influence from outside the market.

Main features of perfect competition

We can distinguish the following features that a perfectly competitive market should have:

A large number of sellers or manufacturers of products. That is, the entire demand that exists on the market must be covered not by one or several enterprises, as in the case of a monopoly and oligopoly;

Products on such a market must be either homogeneous or interchangeable. It is understood that sellers or manufacturers produce a product that can be completely replaced by the products of other market participants;

Prices are set only by the market and depend on supply and demand. Neither the state nor specific sellers or manufacturers should influence pricing. The price of a product should be determined by the level of demand as well as supply;

There should be no barriers to entry or exit into a perfectly competitive market. Examples can be very different from the field of small business, where special requirements have not been created and special licenses are not needed: atelier, shoe repair services, etc.;

There should be no other external influences on the market.

Perfect competition is extremely rare

In the real world, it is impossible to give examples of perfectly competitive firms, since there is simply no market that functions according to such rules. There are segments that are as close as possible to its conditions.

To find such examples, it is necessary to find those markets in which small businesses mainly operate. If the market where it operates can be entered by any company and easily exited, then this is a sign of such competition.

Examples of perfect and imperfect competition

If we talk about imperfect competition, monopoly markets are its clear representative. Enterprises that operate in such conditions have no incentive to develop and improve.

In addition, they produce such goods and provide such services that cannot be replaced by any other product. This explains why it is poorly controlled and established through non-market means. An example of such a market is an entire sector of the economy - the oil and gas industry, and the monopoly company is OJSC Gazprom.

An example of a perfectly competitive market is the car repair industry. Various service stations and auto repair shops both in the city and in other populated areas there are a lot. The type and amount of work performed is almost the same everywhere.

It is impossible in the legal field to artificially increase prices for goods if there is perfect competition in the market. Everyone has seen examples confirming this statement more than once in their life on the regular market. If one vegetable seller raised the price of tomatoes by 10 rubles, despite the fact that their quality is the same as that of competitors, then buyers will stop buying from him.

If at can influence the price by increasing or decreasing supply, then in this case such methods are not suitable.

With perfect competition, you cannot independently increase the price, as a monopolist can do.

Due to the large number of competitors, it is impossible to simply increase the price, since all customers will simply switch to purchasing relevant goods from other enterprises. Thus, an enterprise may lose its market share, which will entail irreversible consequences.

In addition, in such markets there is a reduction in prices for goods by individual sellers. This occurs in an attempt to “win” new market shares to increase revenue levels.

And in order to reduce prices, it is necessary to spend less raw materials and other resources on the production of one unit of product. Such changes are possible only through the introduction of new technologies and other processes that can reduce the level of costs of doing business.

In Russia, markets that are close to perfect competition are not developing fast enough

If we talk about the domestic market, perfect competition in Russia, examples of which are found in almost all areas of small business, is developing at an average pace, but it could be better. The main problem is the weak support of the state, since so far many laws are focused on supporting large manufacturers which are often monopolists. In the meantime, the small business sector remains without special attention and necessary financing.

Perfect competition, examples of which are given above, is an ideal form of competition from the understanding of pricing criteria, supply and demand. Today, in no other economy in the world can one find a market that meets all the requirements that must be met under perfect competition.

The manual is presented on the website in an abbreviated version. IN this option testing is not given, only selected tasks and high-quality tasks are given, cut by 30% -50% theoretical materials. Full version I use the manuals in my classes with my students. The content contained in this manual is copyrighted. Attempts to copy and use it without indicating links to the author will be prosecuted in accordance with the legislation of the Russian Federation and the policies of search engines (see provisions on the copyright policies of Yandex and Google).

11.1 Perfect competition

We have already defined that a market is a set of rules using which buyers and sellers can interact with each other and carry out transactions. Over the history of the development of economic relations between people, markets have constantly undergone transformations. For example, 20 years ago there was not the abundance of electronic markets that are available to consumers now. Consumers couldn't buy the book household appliances or shoes by simply opening the online store website and making a few mouse clicks.

At the time when Adam Smith began to talk about the nature of markets, they were structured something like this: most of the goods consumed in European economies were produced by a multitude of manufactories and artisans who used primarily manual labor. The company was very limited in size, and used labor of a maximum of several dozen workers, and most often 3-4 workers. At the same time, there were quite a lot of similar manufactories and artisans, and the producers produced fairly homogeneous goods. The variety of brands and types of goods that we are accustomed to in modern society there was no consumption then.

These features led Smith to conclude that neither consumers nor producers have market power, and the price is 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." Smith summarized the characteristics that were inherent in markets at that time in the term "perfect competition" .

A perfectly competitive market is a market with many small buyers and sellers selling a homogeneous product in 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 capable of ensuring 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 indeed similar to perfect competition, but in the late 19th and early 20th centuries, when the world became industrialized, and in a number of industrial sectors (coal mining, steel production, construction railways, banking) monopolies were formed, it became clear that the model of perfect competition was 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 friction forces.

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, that is, no barriers
A homogeneous product with no qualitative differences is sold on the market.
Product information is open and equally accessible to all market participants

Subject to these conditions, the market is able to allocate resources and benefits efficiently. The criterion for the efficiency of a competitive market is the equality of prices and marginal costs.

Why does allocative efficiency arise when prices equal marginal cost and are lost when prices do not equal marginal cost? What is market efficiency and how is it achieved?

To answer this question, it is enough to consider simple model. Consider potato production in an economy of 100 farmers for whom the marginal cost of potato production is an increasing function. The 1st kilogram of potatoes costs 1 dollar, the 2nd kilogram of potatoes costs 2 dollars and so on. None of the farmers has such differences in the production function that would allow him to gain a competitive advantage over others. In other words, none of the farmers have market power. Farmers can sell all the potatoes they sell at the same price, determined on the market balance 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 per day at a marginal cost of $20.

If the market price is $15 per kilogram, then Ivan has an incentive to increase potato production because each additional product and kilogram sold brings him an increase in profit until his marginal cost exceeds 15. For similar reasons, Mikhail has an incentive to reduction in production volumes.

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 farmer has no influence over the market price, their combined efforts will cause the market price to fall until the opportunity for additional profit for everyone is 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 producer’s marginal costs, but does not exceed them.

Now let's see how equilibrium is established in a 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 company knows that at this price it can sell as many goods as it wants, so there is no point in reducing the price. If a company increases the price of a product, it will not be able to sell anything at all. Under these conditions, the demand for the products of one company becomes absolutely elastic:

The firm takes the market price as given, that is P = const.

Under these conditions, the company’s revenue graph looks like a ray emerging from the origin:

Under perfect competition, a firm's marginal revenue is equal to its price.
MR = P

It's easy to prove:

MR = TR Q ′ = (P * Q) Q ′

Because the P = const, P can be taken out by the sign of the derivative. In the end it turns out

MR = (P * Q) Q ′ = P * Q Q ′ = P * 1 = P

M.R. is the tangent of the angle of inclination of the straight line TR.

A perfectly competitive firm, like any firm in any market structure, maximizes total profit.

A necessary (but not sufficient condition) for maximizing the firm's profit is that the derivative profit is equal to zero.

r Q ′ = (TR-TC) Q ′ = TR Q ′ - TC Q ′ = MR - MC = 0

Or MR = MC

That is MR = MC is another entry for the condition profit Q ′ = 0.

This condition is necessary, but not sufficient to find the point of maximum profit.

At the point where the derivative is zero, there can be a minimum profit along with a maximum.

A sufficient condition for maximizing the firm's profit is to observe the vicinity 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 the maximum rather than the minimum profit. If in this way we have found several local maxima, then to find the global maximum profit we should simply compare them with each other and select the maximum profit value.

For perfect competition, the simplest case of profit maximization looks like this:

More complex cases We will look at profit maximization graphically in the appendix in the chapter.

11.1.2 Supply curve of a perfectly competitive firm

We realized that a necessary (but not sufficient) condition for maximizing a firm's profit is equality P=MC.

This means that when MC is an increasing function, then to maximize profits the firm will choose points lying on the MC curve.

But there are situations when it is profitable for a company to leave the industry instead of producing at the point maximum profit. This occurs when the firm, being at the point of maximum profit, cannot cover its variable costs. In this case, the company receives losses that exceed its fixed costs.
The optimal strategy for the company is to exit the market, because in this case it receives losses exactly equal to its 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 look at the graph 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 exit the industry.

If we consider everything possible options location of straight line P, we will 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 constructed as the part of MC lying above AVC min.

This rule is only applicable 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 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 can be seen from the graph, when Q > 0, the MC graph always lies above the AVC graph (since the MC straight line has a slope 2a, and the straight line AVC is the inclination angle a.

11.1.3 Equilibrium of a perfectly competitive firm in the short run

Let us recall that in the short term the company necessarily has both variable and fixed factors. This means that the company’s costs 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 achieves maximum profit because it P=MC (necessary condition), and profit changes from increasing to decreasing (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 equilibrium the firm receives economic profit and continues to operate in the market. In this case P>AC at the optimal release point Q*.

Let's consider the equilibrium option when the firm receives zero economic profit

In this case, the price at the optimum point is equal to average costs.

A firm can even earn negative economic profits and still continue to operate in the industry. This occurs when the optimum price is lower than average but higher than average variable cost. The company, even receiving economic profit, covers variable and part of the fixed costs. If the company leaves, it will bear all fixed costs, so it continues to operate in the market.

Finally, the firm exits the industry when optimal volume release, 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. A firm exits the industry only when, at the point of optimal output, its revenue does not even cover its variable costs.

11.1.4 Equilibrium of a competitive firm in the long run

The difference between the long-term period and the short-term period is that all factors of production for the company are variable, that is, there are no fixed costs. Also, as in the short term, firms can easily enter and exit the market.

Let us prove that in long term The only stable market condition is one in which the economic profit of each firm tends to zero.

Let's consider 2 cases.

Case 1 . Market price It turns out that firms earn positive economic profits.

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 profits for firms will attract new firms to the industry. When new firms enter the market, they shift market supply to the right, and the equilibrium market price drops to a level at which the opportunity to make a positive profit will not be completely exhausted.

Case 2 . The market price is such that firms receive negative economic profits.

In this case, everything will happen in the opposite direction: since firms receive negative economic profit, some firms will leave the industry, supply will decrease, and the price will rise to a level at which the economic profit of firms will not be equal to zero.

A perfectly competitive market is characterized by the following features:

The firms' products are homogeneous, so consumers don’t care which manufacturer they buy it from. All products in the industry are perfect substitutes, and cross elasticity demand at price for any pair of firms tends to infinity:

This means that any, no matter how small, increase in price by one manufacturer above the market level leads to a reduction in demand for its products to zero. Thus, the difference in prices may be the only reason for preferring one or another company. There is no non-price competition.

The number of economic entities on the market is unlimited, and their specific gravity so small that the decisions of an individual firm (individual consumer) to change the volume of its sales (purchases) do not affect the market price product. This, of course, assumes that there is no collusion between sellers or buyers to obtain monopoly power in the market. The market price is the result of the joint actions of all buyers and sellers.

Freedom of entry and exit on the market. There are no restrictions or barriers - there are no patents or licenses limiting activities in this industry, significant initial capital investments are not required, the positive effect of scale of production is extremely insignificant and does not prevent new firms from entering the industry, there is no government intervention in the mechanism of supply and demand (subsidies , tax benefits, quotas, social programs and so on.). Freedom of entry and exit presupposes absolute mobility of all resources, freedom of their movement geographically and from one type of activity to another.

Perfect knowledge all market entities. All decisions are made with certainty. This means that all firms know their revenue and cost functions, the prices of all inputs, and everything possible technologies, and all consumers have full information about the prices of all companies. It is assumed that information is distributed instantly and free of charge.

These characteristics are so strict that there are practically no real markets that fully satisfy them.

However, the perfect competition model:

allows you to explore markets in which a large number of small firms sell homogeneous products, i.e. markets similar in terms of conditions to this model;

clarifies the conditions for maximizing profits;
is the standard for assessing the performance of the real economy.

Short-run equilibrium of a firm under perfect competition

Demand for a perfect competitor's product

Under conditions of perfect competition, the prevailing market price is established through the interaction of market demand and market supply, as shown in Fig. 4.1, and determines the horizontal curve of demand and average income (AR) for each individual firm.

Rice. 4.1. Demand curve for a competitor's product

Due to the homogeneity of products and the presence of a large number of perfect substitutes, no firm can sell its goods at a price even slightly higher than the equilibrium price, Pe. On the other hand, an individual firm is very small compared to the total market, and it can sell all its output at the price Pe, i.e. she has no need to sell the goods at a price below Re. Thus, all firms sell their products at the market price Pe, determined by market supply and demand.

The income of a firm that is a perfect competitor

The horizontal demand curve for the products of an individual firm and a single market price (P=const) predetermine the shape of income curves under conditions of perfect competition.

1. Total income () - total value income received by the company from the sale of all its products,

represented on the graph by a linear function that has a positive slope and originates at the origin, since any unit of output sold increases volume by an amount equal to the market price!!Re??.

2. Average income () - income from the sale of a unit of production,

is determined by the equilibrium market price!!Re??, and the curve coincides with the firm's demand curve. A-priory

3. Marginal income () - additional income from the sale of one additional unit of output,

Marginal revenue is also determined by the current market price for any volume of output.

A-priory

All income functions are presented in Fig. 4.2.

Rice. 4.2. Competitor's income

Determining the optimal output volume

In perfect competition, the current price is set by the market, and an individual firm cannot influence it because it is price taker. Under these conditions, the only way to increase profits is to regulate output.

Based on the market and technological conditions existing at a given time, the company determines optimal output volume, i.e. volume of output providing the company profit maximization(or minimization if making a profit is impossible).

There are two interrelated methods for determining the optimum point:

1. Total cost - total income method.

The firm's total profit is maximized at the level of output where the difference between and is as large as possible.

n=TR-TC=max

Rice. 4.3. Determining the optimal production point

In Fig. 4.3, the optimizing volume is located at the point where the tangent to the TC curve has the same slope as the TR curve. The profit function is found by subtracting TC from TR for each volume of production. The peak of the total profit curve (p) shows the level of output at which profit is maximized in the short run.

From the analysis of the total profit function it follows that total profit reaches its maximum at the volume of production at which its derivative is equal to zero, or

dп/dQ=(п)`= 0.

The derivative of the total profit function has a strictly defined economic sense is the marginal profit.

Marginal profit ( MP) shows the increase in total profit when the volume of output changes by one unit.

If Mn>0, then the total profit function increases, and additional production can increase the total profit.
If MP<0, то функция совокупной прибыли уменьшается, и дополнительный выпуск сократит совокупную прибыль.
And finally, if Mn=0, then the value of the total profit is maximum.

From the first condition of profit maximization ( MP=0) the second method follows.

2. Marginal cost-marginal revenue method.

Мп=(п)`=dп/dQ,
(n)`=dTR/dQ-dTC/dQ.

And since dTR/dQ=MR, A dTC/dQ=MS, then total profit reaches its greatest value at such a volume of output at which marginal costs are equal to marginal revenue:

If marginal costs are greater than marginal revenue (MC>MR), then the enterprise can increase profits by reducing production volume. If marginal cost is less than marginal revenue (MC<МR), то прибыль может быть увеличена за счет расширения производства, и лишь при МС=МR прибыль достигает своего максимального значения, т.е. устанавливается равновесие.

This equality valid for any market structure, but in conditions of perfect competition it is slightly modified.

Since the market price is identical to the average and marginal revenues of a firm - a perfect competitor (PAR = MR), the equality of marginal costs and marginal revenues is transformed into the equality of marginal costs and prices:

Example 1. Finding the optimal output volume under conditions of perfect competition.

The firm operates in conditions of perfect competition. Current market price P = 20 USD The total cost function has the form TC=75+17Q+4Q2.

It is necessary to determine the optimal output volume.

Solution (1 way):

To find the optimal volume, we calculate MC and MR and equate them to each other.

1. МR=P*=20.
2. MS=(TS)`=17+8Q.
3. MC=MR.
20=17+8Q.
8Q=3.
Q=3/8.

Thus, the optimal volume is Q*=3/8.

Solution (2 way):

The optimal volume can also be found by equating the marginal profit to zero.

1. Find the total income: TR=Р*Q=20Q
2. Find the total profit function:
n=TR-TC,
n=20Q-(75+17Q+4Q2)=3Q-4Q2-75.
3. Define the marginal profit function:
MP=(n)`=3-8Q,
and then equate MP to zero.
3-8Q=0;
Q=3/8.

Solving this equation, we got the same result.

Condition for obtaining short-term benefits

The total profit of an enterprise can be assessed in two ways:

P=TR-TC;
P=(P-ATS)Q.

If we divide the second equality by Q, we get the expression

characterizing the average profit, or profit per unit of output.

It follows from this that whether a firm obtains profits (or losses) in the short term depends on the ratio of its average total costs (ATC) at the point of optimal production Q* and the current market price (at which the firm, a perfect competitor, is forced to trade).

The following options are possible:

if P*>ATC, then the firm has positive economic profit in the short term;

Positive economic profit

In the presented figure, the volume of total profit corresponds to the area of the shaded rectangle, and the average profit (i.e. profit per unit of output) is determined by the vertical distance between P and ATC. It is important to note that at the optimum point Q*, when MC = MR, and the total profit reaches its maximum value, n = max, the average profit is not maximum, since it is determined not by the ratio of MC and MR, but by the ratio of P and ATC.

if P*<АТС, то фирма имеет в краткосрочном периоде отрицательную экономическую прибыль (убытки);

Negative economic profit (loss)

if P*=ATC, then economic profit is zero, production is break-even, and the firm receives only normal profit.

Zero economic profit

Condition for cessation of production activities

In conditions when the current market price does not bring positive economic profit in the short term, the company faces a choice:

or continue unprofitable production,
or temporarily suspend its production, but incur losses in the amount of fixed costs ( F.C.) production.

The company makes a decision on this issue based on the ratio of its average variable cost (AVC) and market price.

When a firm decides to close, its total revenues ( TR) fall to zero, and the resulting losses become equal to its total fixed costs. Therefore, until price is greater than average variable cost

P>АВС,

company production should continue. In this case, the income received will cover all variables and at least part of the fixed costs, i.e. losses will be less than at closure.

If price equals average variable cost

then from the point of view of minimizing losses to the company indifferent, continue or cease its production. However, most likely the company will continue to operate in order not to lose its customers and preserve the jobs of its employees. At the same time, its losses will not be higher than at closure.

And finally, if prices are less than average variable costs then the company should cease operations. In this case, she will be able to avoid unnecessary losses.

Condition for termination of production

Let us prove the validity of these arguments.

A-priory, n=TR-TC. If a firm maximizes its profit by producing the nth number of products, then this profit ( pn) must be greater than or equal to the profit of the company in conditions of closure of the enterprise ( By), because otherwise the entrepreneur will immediately close his enterprise.

In other words,

Thus, the firm will continue to operate only as long as the market price is greater than or equal to its average variable cost. Only under these conditions will the company minimize its losses in the short term by continuing its activities.

Interim conclusions for this section:

Equality MS=MR, as well as equality MP=0 show the optimal output volume (i.e., the volume that maximizes profits and minimizes losses for the company).

The relationship between price ( R) and average total costs ( ATS) shows the amount of profit or loss per unit of output if production continues.

The relationship between price ( R) and average variable costs ( AVC) determines whether or not it is necessary to continue activities in the event of unprofitable production.

Short-run supply curve of a competing firm

A-priory, supply curve reflects the supply function and shows the quantity of goods and services that producers are willing to offer to the market at given prices, at given time and this place.

To determine the shape of the short-run supply curve for a perfectly competitive firm,

Competitor's supply curve

Suppose the market price is Ro, and the average and marginal cost curves look like in Fig. 4.8.

Because the Ro(closing point), then the firm’s supply is zero. If the market price rises to more than high level, then the equilibrium production volume will be determined by the relation M.C. And M.R.. The very point of the supply curve ( Q;P) will lie on the marginal cost curve.

By successively increasing the market price and connecting the resulting dots, we get the short-run supply curve. As can be seen from the presented Fig. 4.8, for a perfect competitor firm, the short-run supply curve coincides with its marginal cost curve ( MS) above the minimum level of average variable costs ( AVC). At lower than min AVC level of market prices, the supply curve coincides with the price axis.

Example 2. Definition of a sentence function

It is known that a perfect competitor firm has total (TC) and total variable (TVC) costs represented by the following equations:

TS=10+6 Q-2 Q 2 +(1/3) Q 3 , WhereTFC=10;
TVC=6 Q-2 Q 2 +(1/3) Q 3 .

Determine the supply function of a firm under perfect competition.

Solution:

1. Find MS:

MS=(TS)`=(VC)`=6-4Q+Q 2 =2+(Q-2) 2 .

2. Let us equate MC to the market price (condition of market equilibrium under perfect competition MC=MR=P*) and obtain:

2+(Q-2) 2 = Por

Q=2(P-2) 1/2 , IfR2.

However, from the previous material we know that the volume of supply Q = 0 at P

Q=S(P) at Pmin AVC.

3. Determine the volume at which average variable costs are minimal:

min AVC=(TVC)/ Q=6-2 Q+(1/3) Q 2 ;
(AVC)`= dAVC/ dQ=0;
-2+(2/3) Q=0;
Q=3,

those. Average variable costs reach their minimum at a given volume.

4. Determine what min AVC is equal to by substituting Q=3 into the min AVC equation.

min AVC=6-2(3)+(1/3)(3) 2 =3.

5. Thus, the firm’s supply function will be:

Q=2+(P-2) 1/2 ,IfP3;
Q=0 ifR<3.

Long-run market equilibrium under perfect competition

Long term

So far we have considered the short-term period, which assumes:

the existence of a constant number of firms in the industry;
the presence of enterprises with a certain amount of permanent resources.

In the long term:

all resources are variable, which means that it is possible for a company operating in the market to change the size of production, introduce new technology, or modify products;
change in the number of enterprises in the industry (if the profit received by the company is lower than normal and negative forecasts for the future prevail, the enterprise may close and leave the market, and vice versa, if the profit in the industry is high enough, an influx of new companies is possible).

Basic assumptions of the analysis

To simplify the analysis, let us assume that the industry consists of n typical enterprises with same cost structure, and that a change in the output of existing firms or a change in their number do not affect resource prices(we will remove this assumption later).

Let the market price P1 determined by the interaction of market demand ( D1) and market supply ( S1). The cost structure of a typical company in the short term looks like curves SATC1 And SMC1(Fig. 4.9).

4.9 Long-run equilibrium of a perfectly competitive industry

Mechanism for the formation of long-term equilibrium

Under these conditions, the firm's optimal output in the short run will be q1 units. Production of this volume provides the company with positive economic profit, since the market price (P1) exceeds the firm's average short-term costs (SATC1).

Availability short-term positive profit leads to two interrelated processes:

on the one hand, a company already operating in the industry strives expand your production and receive economies of scale in the long term (according to the LATC curve);
on the other hand, external firms will begin to show interest in penetration into this industry(depending on the amount of economic profit, the penetration process will proceed at different speeds).

The emergence of new firms in the industry and the expansion of the activities of old ones shifts the market supply curve to the right to the position S2(as shown in Fig. 4.9). The market price decreases from P1 before P2, and the equilibrium volume of industry production will increase from Q1 before Q2. Under these conditions, the economic profit of a typical firm falls to zero ( P=SATC) and the process of attracting new companies to the industry is slowing down.

If for some reason (for example, the extreme attractiveness of initial profits and market prospects) a typical firm expands its production to level q3, then the industry supply curve will shift even further to the right to the position S3, and the equilibrium price will fall to the level P3, lower than min SATC. This will mean that firms will no longer be able to make even normal profits and a gradual decline will begin. outflow of companies into more profitable areas of activity (as a rule, the least effective ones go).

The remaining enterprises will try to reduce their costs by optimizing sizes (i.e. by slightly reducing the scale of production to q2) to the level at which SATC=LATC, and it is possible to obtain a normal profit.

Shift of the industry supply curve to the level Q2 will cause the market price to rise to P2(equal to the minimum value of long-term average costs, Р=min LAC). At a given price level, a typical firm makes no economic profit ( economic profit is zero, n=0), and is only capable of extracting normal profit. Consequently, the motivation for new firms to enter the industry disappears and a long-term equilibrium is established in the industry.

Let's consider what happens if the equilibrium in the industry is upset.

Let the market price ( R) has established itself below the long-term average costs of a typical firm, i.e. P. Under these conditions, the company begins to incur losses. There is an outflow of firms from the industry, a shift in market supply to the left, and while market demand remains unchanged, the market price rises to the equilibrium level.

If the market price ( R) is set above the average long-term costs of a typical firm, i.e. P>LAТC, then the firm begins to receive positive economic profit. New firms enter the industry, market supply shifts to the right, and with constant market demand, the price drops to the equilibrium level.

Thus, the process of entry and exit of firms will continue until a long-run equilibrium is established. It should be noted that in practice the regulatory forces of the market work better to expand than to contract. Economic profit and freedom to enter the market actively stimulate an increase in industry production volumes. On the contrary, the process of squeezing firms out of an overexpanded and unprofitable industry takes time and is extremely painful for the participating firms.

Basic conditions for long-term equilibrium

Operating companies the best way use the resources at their disposal. This means that each firm in the industry maximizes its profit in the short run by producing the optimal output at which MR=SMC, or since the market price is identical to marginal revenue, P=SMC.
There are no incentives for other firms to enter the industry. The market forces of supply and demand are so strong that firms are unable to extract more than is necessary to keep them in the industry. those. economic profit is zero. This means that P=SATC.
Firms in the industry cannot reduce total average costs in the long run and make a profit by expanding the scale of production. This means that to earn normal profits, a typical firm must produce a level of output that corresponds to the minimum of long-run average total costs, i.e. P=SATC=LATC.

In long-term equilibrium, consumers pay the minimum economically possible price, i.e. the price required to cover all production costs.

Market supply in the long run

The long-run supply curve of an individual firm coincides with the increasing portion of LMC above min LATC. However, the market (industry) supply curve in the long run (as opposed to the short run) cannot be obtained by horizontally summing the supply curves of individual firms, since the number of these firms varies. The shape of the market supply curve in the long run is determined by how prices for resources in the industry change.

At the beginning of the section, we introduced the assumption that changes in industry production volumes do not affect resource prices. In practice, there are three types of industries:

With fixed costs;
with increasing costs;
with decreasing costs.

Fixed Cost Industries

The market price will rise to P2. The optimal output of an individual firm will be Q2. Under these conditions, all firms will be able to earn economic profits, inducing other companies to enter the industry. The sectoral short-term supply curve moves to the right from S1 to S2. The entry of new firms into the industry and the expansion of industry output will not affect resource prices. The reason for this may be that resources are abundant, so that new firms will not be able to influence resource prices and increase the costs of existing firms. As a result, the LATC curve of a typical firm will remain the same.

Restoring equilibrium is achieved according to the following scheme: the entry of new firms into the industry causes the price to fall to P1; profits are gradually reduced to the level of normal profits. Thus, industry output increases (or decreases) following changes in market demand, but the supply price in the long run remains unchanged.

This means that a fixed cost industry looks like a horizontal line.

Industries with increasing costs

If an increase in industry volume causes an increase in resource prices, then we are dealing with the second type of industry. The long-term equilibrium of such an industry is shown in Fig. 4.9 b.

A higher price allows firms to make an economic profit, which attracts new firms to the industry. The expansion of aggregate production necessitates an ever-increasing use of resources. As a result of competition between firms, prices for resources increase, and as a result, the costs of all firms (both existing and new) in the industry increase. Graphically, this means an upward shift in the marginal and average cost curves of a typical firm from SMC1 to SMC2, from SATC1 to SATC2. The firm's short-run supply curve also shifts to the right. The process of adaptation will continue until economic profit runs out. In Fig. 4.9, the new equilibrium point will be the price P2 at the intersection of the demand curves D2 and supply S2. At this price, a typical firm chooses a production volume at which

P2=MR2=SATC2=SMC2=LATC2.

The long-run supply curve is obtained by connecting the short-run equilibrium points and has a positive slope.

INDUSTRIES WITH DECLINING COSTS

The analysis of long-term equilibrium of industries with decreasing costs is carried out according to a similar scheme. Curves D1, S1 are the initial curves of market demand and supply in the short term. P1 is the initial equilibrium price. As before, each firm reaches equilibrium at point q1, where the demand curve - AR-MR touches min SATC and min LATC. In the long run, market demand increases, i.e. the demand curve shifts to the right from D1 to D2. The market price increases to a level that allows firms to make an economic profit. New companies begin to flow into the industry, and the market supply curve shifts to the right. Expanding production volumes leads to lower prices for resources.

This is a rather rare situation in practice. An example would be a young industry emerging in a relatively undeveloped area, where the resource market is poorly organized, marketing is at a primitive level, and transport system functions poorly. An increase in the number of firms can increase the overall efficiency of production, stimulate the development of transport and marketing systems, and reduce the overall costs of firms.

External savings

Due to the fact that an individual company cannot control such processes, this kind of cost reduction is called external economy(eng. external economies). It is caused solely by industry growth and forces beyond the control of the individual firm. External economies should be distinguished from the already known internal economies of scale, achieved by increasing the scale of the firm’s activities and completely under its control.

Taking into account the factor of external savings, the total cost function of an individual firm can be written as follows:

TCi=f(qi,Q),

Where qi- volume of output of an individual company;

Q— the volume of output of the entire industry.

In industries with constant costs, there are no external economies; the cost curves of individual firms do not depend on the industry's output. In industries with increasing costs, negative external diseconomies take place; the cost curves of individual firms shift upward with increasing output. Finally, in industries with decreasing costs, there are positive external economies that offset the internal diseconomies due to diminishing returns to scale, so that the cost curves of individual firms shift downward as output increases.

Most economists agree that in the absence of technological progress, the most typical industries are those with increasing costs. Industries with decreasing costs are the least common. As industries grow and mature, industries with decreasing and constant costs are likely to become industries with increasing costs. Against, technical progress can neutralize the rise in resource prices and even lead to their fall, resulting in the emergence of a downward-sloping long-term supply curve. An example of an industry in which costs are reduced as a result of scientific and technical progress is the production of telephone services.

Examples of a perfectly competitive market make it clear how efficiently market relations work. The key concept here is freedom of choice. Perfect competition occurs when many sellers sell an identical product and many buyers purchase it. No one has the power to dictate terms or raise prices.

Examples of a perfectly competitive market are not very common. In reality, very often there are cases when only the will of the seller decides how much a particular product will cost. But with an increase in the number of market players who sell identical goods, unreasonable overestimation is no longer possible. The price is less dependent on one specific merchant or a small group of sellers. At serious increase competition, on the contrary, buyers determine the cost of the product.

Examples of a perfectly competitive market

In the mid-1980s, agricultural prices fell sharply in the United States. Dissatisfied farmers began to blame the authorities for this. In their opinion, the state has found a tool to influence agricultural prices. It dropped them artificially in order to save on mandatory purchases. The drop was 15 percent.

Many farmers personally went to the largest commodity exchange in Chicago to make sure they were right. But what they saw there was trading platform brings together a huge number of sellers and buyers of agricultural products. No one is able to artificially lower the price of any product, since there are a huge number of participants in this market on both sides. This explains that in such conditions unfair competition is simply impossible.

Farmers personally saw at the stock exchange that everything is dictated by the market. Prices for goods are set regardless of the will of one particular person or state. The balance of buyers and sellers determined the final price.

This example illustrates this concept. Complaining about fate, US farmers began to try to get out of the crisis and no longer blamed the government.

Signs of perfect competition

These include the following:

The price of a product is the same for all buyers and sellers in the market.
Product identity.
All market players have full knowledge of the product.
A huge number of buyers and sellers.
None of the market participants individually influences pricing.
The manufacturer has the freedom to enter any area of production.

All of these features of perfect competition, as presented, are very rarely present in any industry. There are few examples, but they exist. These include the grain market. Demand for agricultural goods always regulates pricing in this industry, since it is here that all of the above signs can be seen in one area of production.

Advantages of perfect competition

The main thing is that in conditions of limited resources, distribution is more equitable, since the demand for goods determines the price. But the increase in supply does not allow it to be particularly overestimated.

Disadvantages of Perfect Competition

Perfect competition has a number of disadvantages. Therefore, you cannot completely strive for it. These include:

The model of perfect competition slows down scientific and technological progress. This is often due to the fact that the sale of goods, when supply is high, is sold slightly above cost with minimal profit. Large investment reserves are not accumulated, which could be used to create more advanced production.
Products are standardized. No uniqueness. No one stands out for their sophistication. This creates a kind of utopian idea of equality, which consumers do not always accept. People have different tastes and needs. And they need to be satisfied.
Production does not calculate the maintenance of the non-productive sector: teachers, doctors, army, police. If the entire economy of the country had a complete perfect view, humanity would forget about such concepts as art and science, since there would simply be no one to feed these people. They would be forced to go into the manufacturing sector for a minimum source of income.

Examples of a perfectly competitive market showed consumers the homogeneity of products and the lack of opportunity to develop and improve.

Marginal revenue

Perfect competition has a negative impact on expansion economic enterprises. This is related to the concept of “marginal revenue”, due to which firms do not dare to build new production facilities, increase acreage, etc. Let’s take a closer look at the reasons.

Let's say one agricultural producer sells milk and decides to increase production. At the moment, the net profit from one liter of product is, for example, 1 dollar. Having spent funds on expanding feed supplies and building new complexes, the enterprise increased production by 20 percent. But his competitors also did this, also hoping for stable profits. As a result, twice as much milk entered the market, which reduced the cost of finished products by 50 percent. This led to production becoming unprofitable. And the more livestock a producer has, the more losses he incurs. The perfectly competitive industry goes into recession. This shining example marginal revenue, beyond which the price will not rise, and an increase in the supply of goods to the market will only bring losses, not profits.

The antipode of perfect competition

It is unfair competition. It occurs when there are a limited number of sellers on the market, and the demand for their products is constant. In such conditions, it is much easier for enterprises to reach an agreement among themselves, dictating their prices on the market. Unfair competition is not always a conspiracy or a scam. Very often, associations of entrepreneurs occur in order to develop common rules of the game, quotas for manufactured products for the purpose of competent and effective growth and development. Such firms know and calculate profits in advance, and their production is deprived of marginal revenue, since none of the competitors suddenly throws a huge volume of products onto the market. Its highest form is a monopoly, when several large players unite. They are losing competition. In the absence of other producers of identical goods, monopolies can set inflated, unreasonable prices, receiving excess profits.

Officially, many states fight such associations by creating antimonopoly services. But in practice their struggle does not bring much success.

Conditions under which unfair competition occurs

Unfair competition occurs under the following conditions

A new, unknown area of production. Progress does not stand still. New science and technology appear. Not everyone has huge financial resources to develop technology. Often, several leading companies create more advanced products and have a monopoly on their sales, thereby artificially inflating the price of a given product.
Productions that depend on powerful associations into a single large network. For example, the energy sector, the railway network.

But this is not always detrimental to society. The advantages of such a system include the opposite disadvantages of perfect competition:

Huge windfalls allow you to invest in modernization, development, and scientific and technological progress.
Often such enterprises expand the production of goods, creating a competition for customers between their products.
The need to protect one's position. Creation of the army, police, public sector workers, since many people are freed hands free. There is a development of culture, sports, architecture, etc.

Results

To summarize, we can conclude that there is no system that is ideal for a particular economy. Every perfect competition has a number of disadvantages that slow down society. But the arbitrariness of monopolies and unfair competition only leads to slavery and a miserable existence. There is only one result - you need to find a middle ground. And then the economic model will be fair.

Characteristics of perfect competition. Characteristics of a perfectly competitive market

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