A perfectly competitive market in the long run. Competitive firm in the long run In the long run, the firm is a perfect competitor

Under conditions of perfect competition, homogeneous goods are produced, often completely identical. It doesn't matter to the buyer which company to buy them from as long as the price is the same. At any price above the market price, demand is zero, since the buyer is not interested in purchasing a product more expensive than he can pay. Thus, the demand for an individual seller's product is perfectly elastic.

The situation under consideration can be approached from the other side. If a firm is a price taker, then it can sell any quantity of output at the market price. In any case, its supply to the market does not fundamentally change the total volume of industry supply. There is no point in selling cheaper if you can sell everything at the price given by the market.

The company will not be able to sell at a higher price: in this case, the demand for its products will immediately drop to zero (after all, consumers can easily buy the same goods from other manufacturers at the market price). Thus, the market will accept the firm's products only at the market price. In this regard, the demand curve for the company's products will be a horizontal straight line, spaced from the horizontal axis by a height equal to the market price of the product (Fig. 1).

It is interesting to note that this same straight line will also be a graph of the average and marginal income of the company. With each new unit of product sold, the firm's income will increase by an amount equal to the price of this product. The average income per unit of product will also be equal to its price. Thus, D=MR=AR (Fig. 2).

As for the total income of the company, it can be easily calculated using the formula P*Q.

Fig.2.

To characterize the behavior of a company or enterprise, the concepts of gross, average and marginal income are important.

Gross income, or gross revenue TR (total revenue) - the total amount of proceeds from the sale a certain amount goods TR=PЧQ, where P is the price of goods sold, Q is sales volume. Average income, or average revenue AR (average revenue), is defined as income per unit of good sold AR=TR/Q. Marginal revenue, or marginal revenue MR (marginal revenue) is an increase in income arising from an additional increase in output MR=ДTR/ДQ. Usually DQ is taken equal to 1.

Graphically, the amount of total, or gross, income can be illustrated using the example of the rectangle OP1TQ1 in (Fig. 2) or depicted as a special curve (Fig. 3). Under perfect competition, the total revenue curve is a straight line through the origin.

A number of consequences follow from the above definitions.

Consequence 1. The gross revenue of the seller in conditions of pure competition is directly proportional to the quantity of goods sold (Fig. 3).

Corollary 2. The average revenue of a seller under conditions of pure competition is the price of the product (Fig. 2).

Corollary 3. The marginal revenue (MR) of a seller under conditions of pure competition is the price of the product.

MR=TR: DQ=DPQ: DQ=PDQ:Q=P

A set of homogeneous firms producing products of the same range forms an industry. It is the total output of the industry as a whole that forms the total volume of supply and also affects the market price. Under such conditions, the quantity of demand varies depending on different levels prices The industry (market) demand curve is a downward sloping curve and can be depicted both in the form of a conditional straight line and in the form of a curve (Fig. 4). This is explained by the fact that the demand for those products that are offered by manufacturers in perfectly competitive markets can have either the same or different elasticity in different parts of the industry’s aggregate demand curve (this is due to the nature of the product itself, the current macroeconomic situation, determining the real and expected level of income and savings of consumers) in contrast to the demand curve of an individual firm, which is absolutely elastic (see Fig. 1).

Fig.4.

Fig 5.

The equilibrium of a perfectly competitive firm, like any other economic entity, is understood as a situation where the enterprise has no incentive to change its state, and any imbalance can only worsen its position (reduce income).

It would be a mistake to assume that a firm (in the short run) always makes an economic profit. Moreover, it is not always possible for a company to make a normal profit. The market situation may turn out to be unfavorable, and the market price may be so low that the total average costs will not be fully compensated, and therefore there will be no normal profit.

In the short run, a perfectly competitive firm will be able to operate either at a profit or at a loss. This fact is explained by the fact that the short-term period is inherently insufficient time intervals to expand or reduce production (including in any way influencing changes in the level of fixed production costs, which in some industries are decisive in relation to making decisions on starting or continuing to do business in a given industry), as well as in order to leave the industry. The period of time during which this can be done will in itself no longer be short-term, but will be either medium-term or long-term. Getting zero profit is possible as a special case, so the company strives to maximize profits or minimize losses. In both cases we're talking about on choosing the optimal volume of production. Let's consider both options.

Under the condition of operating at a profit (Fig. 5), the enterprise has a positive difference between the total revenue TR and the total costs TC. This is the firm's total profit. Per unit of output, the profit will be the difference between the price P and the average total costs of the vehicle. The presence of profit means that the price line (equal to marginal revenue MR) will pass above the minimum point of average costs, crossing the ATC curve (Fig. 5).

What output volume will be optimal? The one at which the total profit reaches its maximum value. A situation that meets this requirement is an equilibrium one. In the figure it corresponds to point E, where the price P and marginal cost curves MC intersect. This point is characterized by the equilibrium output QE and the equilibrium price PE. The latter (in the figure - equal segments OPE and QEE) includes average costs and average profit MPE=KE.

Total revenue, equal to the product of price and production volume TR=P*Q, in equilibrium conditions will be represented by the area of ​​the rectangle OPEEQE. The total costs of a firm in an equilibrium situation are the product of average costs and output TC=ATC*Q. in the figure is the area of ​​the rectangle OMKQE. In this case, the total profit, i.e. the difference between total revenue and total costs will be represented by the area of ​​the rectangle MPEEK. This area and, accordingly, the volume of total profit will be maximum in an equilibrium situation.

Thus, the amount of total profit reaches a maximum at such output at which marginal revenue (price) is equal to marginal costs: MC=MR(P).

It is this equality that characterizes the equilibrium condition of a perfectly competitive firm in the short run.

The short-term supply curve discussed above describes the prompt response of a profit-maximizing or loss-minimizing firm to short-term current fluctuations in the price of a product. However, the entrepreneur is interested not only in the immediate result, but also in the prospects for the development of the enterprise. The main strategic criterion is obtaining a stable profit stream through active access to the most efficient production volumes in accordance with the forecast of the market state in the long term.

The long run differs from the short run in that, firstly, the manufacturer can increase production capacity (so all costs become variable) and, secondly, the number of firms in the market can change. In other words, a company can curtail production (go out of business) or start producing new types of products (enter business), and in conditions of perfect competition, the entry and exit of new firms into the market is absolutely free. There are no legal or economic barriers of any kind.

Free entry into the industry and equally free exit from it is one of the main features of a perfectly competitive market. Freedom of entry, of course, does not mean that a firm can enter an industry without incurring any costs. This means that it has made all the necessary investments to enter the industry and is competing with existing enterprises. In such a situation, the path of new firms is not hampered by new restrictions related to the validity of patents and licenses, or to the presence of explicit or hidden collusion. Likewise, freedom of exit means that a firm wishing to leave an industry will not encounter any barriers to closing the enterprise or moving its activities to another region. At the same time, when a company leaves the industry, it either finds a new use for its permanent assets or sells them without damage to itself.

If a firm has economic profit in the short term, then its production becomes more attractive to other producers. New firms enter the competitive product market, diverting part of the effective demand. In order to sell successfully, a given enterprise is forced to reduce prices or incur additional costs to support sales. Profits are declining, the influx of competitors is decreasing.

In the case of unprofitable production, the picture is the opposite: individual firms will be forced to leave the industry, which will lead to an increase in the demand price for other firms. This process will continue until the price at least covers the average costs of the remaining firms in the industry, i.e. P=ATS. If the process of firms exiting the industry continues, then an increase in price will lead to its excess over the average costs for the remaining firms in the industry and, consequently, to the receipt of economic profit by these firms, which in turn will serve as a signal for new firms to enter the industry.

The process of entry and exit will only cease when there is no economic profit. A firm making zero profit has no incentive to exit the business, and other firms have no incentive to enter the business. There is no economic profit when the price coincides with the minimum average cost, i.e. the firm belongs to the “limit” type. In this case we are talking about long-term average costs (LAC).

Long-run average cost is the cost of producing a unit of output in the long run. Each point (LAC) corresponds to the minimum short-term unit cost (ATC) for any enterprise size (output volume). The nature of the long-term cost curve is associated with the concept of economies of scale, which describes the relationship between the scale of production and the magnitude of costs. Positive economies of scale are characterized by a descending branch of LAC and characterize the inverse relationship between average long-term costs and the size of the firm (Fig. 6). The negative scale effect (in the figure - the ascending branch of LAC) expresses the direct relationship between these quantities. The minimum long-term costs determines the optimal size of the enterprise. If the price is equal to the minimum long-term unit costs, the firm's profit in the long run is zero.

Fig.6.

Thus, the condition for the long-term equilibrium of the firm is that the price is equal to the minimum of long-term unit costs (P=minLAC).

Production at minimum average cost means production at the most efficient combination of resources, i.e. firms make the best use of factors of production and technology. This is certainly a positive phenomenon, primarily for the consumer. It means that the consumer receives the maximum volume of output at the lowest price allowed by unit costs.

A firm's long-run supply curve, like its short-run supply curve, is the portion of its long-run marginal cost (LAC) curve located above point E, the minimum long-run unit cost. If the price falls below this point, the firm is not covering all its costs and should exit the industry.

The market supply curve is obtained by summing the volumes of long-term supply of individual firms. However, unlike the short-term period, the number of firms in the long-term may change.

What forces firms to enter into business if economic profit in the long run is reduced to zero? It's all about the possibility of obtaining high short-term profits. The influence of external factors, in particular changes in demand, can provide such an opportunity by changing the situation of short-term equilibrium. Increased demand will bring short-term economic benefits. In the future, the action will unfold according to the scenario already described above. In this case, there are 3 options for changing the industry supply:

1. the offer price is unchanged;

2. the offer price increases;

3. the offer price decreases.

The implementation of one or another option is determined by the degree of dependence between the change in output volume and the change in supply price. The supply price level, in turn, is determined by the amount of costs, therefore, the cost of resources. Here you can define 3 options (Fig. 7a, b, c).

Fig.7

1. Prices for resources are unchanged. This is possible when the demand of a particular industry for resources is a small part of the total demand. The industry can expand without significantly affecting prices and costs. Expansion or contraction of an industry affects only the volume of production and does not affect the price. An increase in demand means that the corresponding curve moves upward to the right, towards a higher price. Since any firm in the industry is in the position of a price taker, it will consider the price increase as an external factor and respond to it by increasing production volume from Q1 to Q2 (Fig. 7a.). Attracting new firms into production and tightening the competition regime leads to an increase in market supply to Q3 and a reduction in prices to the initial level. Thus, the firm's long-run equilibrium is restored, and the industry supply curve is a completely horizontal line.

We looked at industries with fixed costs. As a rule, we are talking about the use of traditional resources used by other industries.

2. Prices for resources are increasing. Most industries use specific resources, the quantity of which is limited. Their use determines the ascending nature of the costs of this industry. As the industry expands, the average cost curve shifts upward, i.e. the entry of new firms affects the prices of resources, and therefore the amount of costs. The entry of new firms increases the demand for resources and increases the price. Therefore, the industry will produce more products only at a higher price (Fig. 7.b). This refers to an industry with increasing costs.

3. prices for resources are decreasing. The long-run supply curve has a negative slope. With the consolidation of an industry, it has the opportunity to purchase more factors of production at a lower price. In this case, the average cost curves of firms shift downward and the market price of the product decreases. This leads to a new long-run industry equilibrium with more firms, more output, and lower product prices. Consequently, in the area with decreasing costs, the industry's long-term aggregate supply curve slopes downwards (Fig. 7.c).

In any case, in the long run, the industry supply curve will be flatter compared to the short-term supply curve, since, firstly, the ability to use all resources in the long run allows for a more active influence on price changes (therefore, for each individual firm, and therefore the industry in In general, the supply curve will be more elastic). Secondly, the possibility of new firms entering the industry and “old” ones leaving the industry allows the industry to to a greater extent than possible in the short term, to respond to changes in market prices. Consequently, output will increase or decrease by a greater amount in the long run than in the short run in response to an increase or decrease in price. In addition, the industry's long-term supply price minimum is higher than its short-term supply price minimum because all costs are variable and must be recovered.

An entrepreneur is interested not only in the immediate result, but also in the prospects for the development of the enterprise. Obviously, in the long run the company also proceeds from the task of maximizing profit.

The long-term period differs from the short-term period in that, firstly, the manufacturer can increase production capacity (so all costs become variable) and, secondly, the number of firms in the market can change. In conditions of perfect competition, entry and exit of new firms into the market is absolutely free. Therefore, in the long term, the level of profit becomes a regulator of attracting new capital and new firms to the industry.

If the market price established in the industry is higher than the minimum average cost, then the possibility of obtaining economic profit will serve as an incentive for new firms to enter the industry. As a result, industry supply will increase and the price will decrease. Conversely, if firms make losses (at prices below minimum average cost), this will lead to many of them closing and capital flowing out of the industry. As a result, industry supply will decrease, leading to higher prices.

The process of entry and exit of firms will stop only when there is no economic profit. A firm making zero profit has no incentive to exit the business, and other firms have no incentive to enter the business. There is no economic profit when price equals minimum average cost. In this case we are talking about long-term average costs.

Long-term average costs are the costs of producing a unit of output in the long run. Each point corresponds to the minimum short-term unit costs for any enterprise size (output volume). The nature of the long-term cost curve is associated with the concept of economies of scale, which describes the relationship between the scale of production and the magnitude of costs (economies of scale were discussed in the previous chapter). The minimum long-term costs determines the optimal size of the enterprise. If the price is equal to the minimum long-run unit cost, the firm's long-run profit is zero.

Production at minimum average cost means production at the most efficient combination of resources, i.e. firms make the best use of factors of production and technology. This is certainly a positive phenomenon, primarily for the consumer. It means that the consumer receives the maximum volume of output at the lowest price allowed by unit costs.

A firm's long-run supply curve, like its short-run supply curve, is the portion of its long-run marginal cost curve that lies above the minimum point of long-run unit costs. The industry supply curve is obtained by summing the long-term supply volumes of individual firms. However, unlike the short-term period, the number of firms in the long-term may change.

So, in the long run in a perfectly competitive market, the price of a product tends to minimize average costs, and this, in turn, means that when long-run industry equilibrium is achieved, the economic profit of each firm will be zero.

At first glance, one may doubt the correctness of this conclusion: after all, individual firms can use unique production factors, such as soils of high fertility, highly qualified specialists, modern technology, allowing you to produce products with less materials and time.

Indeed, the resource costs per unit of output of competing firms may differ, but their economic costs will be the same. The latter is explained by the fact that in conditions of perfect competition in the factor market, a firm will be able to acquire a factor with increased productivity if it pays for it a price that raises the firm’s costs to general level in branch. Otherwise, this factor will be purchased by a competitor.

If the firm already has unique resources, then the increased price should be taken into account as an opportunity cost, because at that price the resource could be sold.

What motivates firms to enter an industry if long-run economic profits are zero? It all depends on the possibility of obtaining high short-term profits. The influence of external factors, in particular changes in demand, can provide such an opportunity by changing the situation of short-term equilibrium. Increased demand will bring short-term economic benefits. In the future, the action will develop according to the scenario already described above.

Thus, perfect competition has a unique self-regulation mechanism. Its essence is that the industry reacts flexibly to changes in demand. It attracts a volume of resources that increases or decreases supply just enough to compensate for changes in demand, and on this basis ensures the long-term break-even of firms operating in the industry.

If we connect two industry equilibrium points in the long run at various combinations aggregate demand and aggregate supply, then the industry supply line in the long run is formed - S1. Since we have assumed that factor prices are constant, line S1 runs parallel to the x-axis. This is not always the case. There are industries in which resource prices increase or decrease.

Most industries use specific resources, the number of which is limited. Their use determines the ascending nature of costs in this industry. The entry of new firms will lead to an increase in demand for resources, the emergence of their shortage and, as a result, an increase in prices. As each new firm enters the market, scarce resources will become more and more expensive. Therefore, the industry will only be able to produce more products at a higher price.

Finally, there are industries in which, as the volume of a resource used increases, its price decreases. In this case, the minimum average cost is also reduced. Under such conditions, an increase in industry demand will cause in the long run not only an increase in supply, but also a decrease in the equilibrium price. Curve S1 will have a negative slope.

In any case, in the long run, the industry supply curve will be flatter than the short-run supply curve. This is explained as follows. Firstly, the ability to use all resources in the long term allows you to more actively influence price changes, therefore, for each individual firm, and, consequently, the industry as a whole, the supply curve will be more elastic. Secondly, the possibility of “new” firms entering the industry and “old” firms leaving the industry allows the industry to respond to changes in market prices to a greater extent than in the short term.

Consequently, output will increase or decrease by a greater amount in the long run than in the short run in response to an increase or decrease in price. In addition, the minimum point of the industry's long-term supply price is higher than the minimum point of the short-term supply price, since all costs are variable and must be recovered.

So, in the long run, under conditions of perfect competition, the following will happen:

A) the equilibrium price will be established at the level of minimum long-term average costs, which will ensure long-term break-even for firms;
b) the supply curve of a competitive industry is a line passing through the break-even points (minimum average costs) for each level of production;
c) with a change in demand for industry products, the equilibrium price may remain unchanged, decrease or increase, depending on how prices for production factors change. The industry supply curve will look like a horizontal straight line (parallel to the x-axis), ascending or descending line.

Short term This is called such a period, during which the production capacity of the company is fixed, but the volume of output can be changed (increased, decreased) by changing the volume of use of variable factors. The total number of enterprises remains unchanged.

Purpose d company being profit maximization.

Profit () is the difference between scoop income ( TR) and scoop costs ( TS) companies: P r = TR– TS.

Both the income source and the firm's costs are an output function Q. Since market price is not under the control of a competitive firm, its main the task is to determine the optimalVoutput, at which it can maximize profits.

Equilibrium output there is a volume of production at which the company's profit is maximum.

There are two methods for determining the optimal V output at which a competitive firm will maximize profit:

1) a method of comparing income scoops and cost scoops ( TR And TS);

2) the method of comparing the income limit and the cost limit ( M.R. And MS).

When using the second method, 2 values ​​are determined and compared: marginal revenue (MR) and marginal cost (MC).

As long as marginal revenue exceeds marginal cost ( M.R. > MS), the company should expand production, because by increasing V production by unit, the company will increase its profit. It must be remembered that the company is interested in profit on the entire mass of output (and not just on the marginal unit). But as soon as pre-e costs exceed marginal revenue ( M.R. < M.C.), the company should reduce production, otherwise its profits will decline.

So, a competitive firm will maximize profits or minimize losses by producingVpr-tions, at which the marginal revenue is equal to the marginal cost(Fig. 14):

MR = MC.

Equality M.R. And MS is a condition for maximizing profit for any company, regardless of the market structure in which it operates.

Since for a perfectly competitive market M.R. = P, then this equality will take the form:

MR = P = MS.

The company makes a profit when the income per unit of production, i.e. AR, exceeds the cost per unit of production, i.e. AC. But since AR = P, then this is equivalent to the statement that the company receives eq profit every time when the market price of the product exceeds cp total costs, i.e. R > AC.

In the short term, all firms will be divided into 4 groups:

firms receiving positive profits;

firms earning normal profit (zero eq profit);

firms that minimize losses;

companies ceasing production.

Firm's supply curve in the short term is an expression of the relationship between market price and volumes of goods offered (Fig. 15).

At a price R Issues 1 and 5 Q 1 company receives economic profit , because R 1 > ATS. At a price R 2 and production volume Q 2 the company receives normal profit (all costs are reimbursed), since R 2 ATS. Full stop E 2 are called break-even point. At a price R Issues 3 and 5 Q 3 company minimizes your losses , since ATS > R 3 > AVC. At a price R 4 and production volume Q 4 company carries losses equal to its fixed costs , because R 4 > AVC. It makes no difference to the company whether it produces a product or closes down. Full stop E 4 are called closing point. At a price R 5 and production volume Q 5 company will not produce because R 4 = min AVC.

Because at a price R 1 , R 2 , R 3 , R 4, the company will produce production, and at a price R 5 will prefer closure, then the following conclusion can be drawn: The supply curve of a perfectly competitive firm focused on maximizing profits in the short run coincideswith the ascending part of the MC curve lying above the point min AVC.

The considered behavior of the company is typical for a short-term period. However, the entrepreneur is interested not only in the immediate result, but also in the prospects for the development of the enterprise. Obviously, in the long run the company also proceeds from the task of maximizing profit.

The long-term period differs from the short-term period in that, firstly, the manufacturer can increase production capacity (so all costs become variable) and, secondly, the number of firms in the market can change. In conditions of perfect competition, entry and exit of new firms into the market is absolutely free. Therefore, in the long term, the level of profit becomes a regulator of attracting new capital and new firms to the industry.

If the market price established in the industry is higher than the minimum average cost, then the possibility of obtaining economic profit will serve as an incentive for new firms to enter the industry. As a result, industry supply will increase (S → S1), and the price will decrease (P > P 1), as shown in Fig. 8.11. Conversely, if firms make losses (at prices below minimum average cost), this will lead to many of them closing and capital flowing out of the industry. As a result, industry supply will decrease (S → S 2), which will lead to an increase in price (P → P 2 ).

The process of entry and exit of firms will stop only when there is no economic profit. A firm making zero profit has no incentive to exit the business, and other firms have no incentive to enter the business. There is no economic profit when price equals minimum average cost. P = ATS type. In this case we are talking about long-term average costs LAC.

Long Run Average Cost LAC (long average costs) are the costs of producing a unit of output in the long run. Every point L.A.C. corresponds to the minimum short-term unit costs ATS for any size of enterprise (volume of output). The nature of the long-term cost curve is associated with the concept of economies of scale, which describes the relationship between the scale of production and the magnitude of costs (economies of scale were discussed in the previous chapter). The minimum long-term costs determines the optimal size of the enterprise. If the price is equal to the minimum long-run unit cost, the firm's long-run profit is zero.

Rice. 8.11. Changes in industry supply

Thus, the condition for the long-term equilibrium of the firm is that the price is equal to the minimum of long-term unit costs RE = = LAC min (Fig. 8.12).

Rice. 8.12. Long-run equilibrium of the firm

Production at minimum average cost means production at the most efficient combination of resources, i.e. firms make the best use of factors of production and technology. This is certainly a positive phenomenon, primarily for the consumer. It means that the consumer receives the maximum volume of output at the lowest price allowed by unit costs.

A firm's long-run supply curve, like its short-run supply curve, is part of its long-run marginal cost curve. L.M.C. located above point E - the minimum long-term unit costs LAC min. The industry supply curve is obtained by summing the long-term supply volumes of individual firms. However, unlike the short-term period, the number of firms in the long-term may change.

So, in the long run in a perfectly competitive market, the price of a product tends to minimize average costs, and this, in turn, means that when long-run industry equilibrium is achieved, the economic profit of each firm will be zero.

At first glance, the correctness of this conclusion can be doubted: after all, individual firms can use unique production factors, such as soils of increased fertility, highly qualified specialists, and modern technology that allows them to produce products with less materials and time.

Indeed, the resource costs per unit of output of competing firms may differ, but their economic costs will be the same. The latter is explained by the fact that in conditions of perfect competition in the factor market, a firm will be able to acquire a factor with increased productivity if it pays for it a price that raises the firm’s costs to the general level in the industry. Otherwise, this factor will be purchased by a competitor.

If the firm already has unique resources, then the increased price should be taken into account as an opportunity cost, because at that price the resource could be sold.

What motivates firms to enter an industry if long-run economic profits are zero? It all depends on the possibility of obtaining high short-term profits. The influence of external factors, in particular changes in demand, can provide such an opportunity by changing the situation of short-term equilibrium. Increased demand will bring short-term economic benefits. In the future, the action will develop according to the scenario already described above.

Let's consider the consequences of changes in demand, provided that prices for resources remain unchanged (Fig. 8.13, a), prices for resources increase (Fig. 8.13, b), prices for resources decrease (Fig. 8.13, c).

Rice. 8.13. Industry supply in the long run

If after reaching equilibrium (point E 1) industry demand will increase ( D 1 → D 2), then initially the price will rise from P 1 before P 2. At this price, firms will begin to earn economic profit, which will lead to an increase in supply in the industry both due to the expansion of production in individual firms and due to the arrival of new firms (in the figure this will be reflected by the shift S1 → S2). As a result, the price will again decrease to the level P 1, since the minimum LAC is equal to this value. Equilibrium in the industry will be established at the point E). If demand decreases (D2 > D1). then the price will decrease from P 1 before R 2. At this price, firms will be at a loss, some of them will close and move to other industries. Market supply will decrease (S2 → S 1). Industry equilibrium will be restored at the point E 1 (see Fig. 8.13, a).

Thus, perfect competition has a unique self-regulation mechanism. Its essence is that the industry reacts flexibly to changes in demand. It attracts a volume of resources that increases or decreases supply just enough to compensate for changes in demand, and on this basis ensures the long-term break-even of firms operating in the industry.

If we connect two industry equilibrium points in the long run for various combinations of aggregate demand and aggregate supply (in Fig. 8.13, and these are the points E 1 And E 2), then the industry supply line in the long run is formed - S1. Since we have assumed that factor prices are constant, line S1 runs parallel to the x-axis. This is not always the case. There are industries in which resource prices increase or decrease.

Most industries use specific resources, the number of which is limited. Their use determines the ascending nature of costs in this industry. The entry of new firms will lead to an increase in demand for resources, the emergence of their shortage and, as a result, an increase in prices. As each new firm enters the market, scarce resources will become more and more expensive. Therefore, the industry will only be able to produce more products at a higher price. This will cause a shift in the S1 curve (Fig. 8.13, b). Market equilibrium will be established at a new point E 2.

Finally, there are industries in which, as the volume of a resource used increases, its price decreases. In this case, the minimum average cost is also reduced. Under such conditions, an increase in industry demand will cause in the long run not only an increase in supply, but also a decrease in the equilibrium price. Curve S 1 will have a negative slope (Fig. 8.13, c). The new long-term equilibrium will be established at the point E 3.

In any case, in the long run, the industry supply curve will be flatter than the short-run supply curve. This is explained as follows. Firstly, the ability to use all resources in the long term allows you to more actively influence price changes, therefore for each individual firm, and therefore for the industry as a whole, the supply curve will be more elastic. Secondly, the possibility of “new” firms entering the industry and “old” firms leaving the industry allows the industry to respond to changes in market prices to a greater extent than in the short term.

Consequently, output will increase or decrease by a greater amount in the long run than in the short run in response to an increase or decrease in price. In addition, the minimum point of the industry's long-term supply price is higher than the minimum point of the short-term supply price, since all costs are variable and must be recovered.

So, in the long run, under conditions of perfect competition, the following will happen:

• a) the equilibrium price will be established at the level of minimum long-term average costs R E = LAC min which will ensure long-term break-even for firms;
• b) the supply curve of a competitive industry is a line passing through the break-even points (minimum average costs) for each level of production;
• c) with a change in demand for industry products, the equilibrium price may remain unchanged, decrease or increase, depending on how prices for production factors change. The industry supply curve will look like a horizontal straight line (parallel to the x-axis), ascending or descending line.

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

ANSWER

PERFECT COMPETITION is a type of market structure where the market behavior of buyers and sellers is to adapt to the equilibrium state of market conditions.

In economic theory, perfect competition is a type of market organization in which all types of rivalry between both sellers and buyers are excluded.

Perfect competition is a scientific abstraction, an ideal type of market structure, and serves as a standard for comparison with other types of market structures.

Perfect competition has the following characteristics:

a) many small sellers and buyers;

b) homogeneity of products, i.e. products offered by competing firms are identical and interchangeable;

c) free entry into and exit from the market (no barriers to entry or barriers to exit from the market for existing firms);

d) perfect awareness (perfect knowledge) of sellers and buyers about the state of the market. Information is distributed among market participants instantly and costs them nothing;

e) sellers and buyers cannot influence prices and take them for granted;

f) mobility of production resources.

A COMPETITIVE FIRM is a firm that accepts the price of its products as given, independent of the volume of products it sells in a perfectly competitive market.

The company's goal is to maximize profit, which is the difference between gross revenue (TR) and total costs (TC) for the sales period:

profit = TR – TS.

Gross income is the price of the good sold (P) multiplied by the sales volume (Q):

A company can influence its income only by changing sales volume. Consequently, the main problem of the company is to find a volume of output that maximizes profit in conditions of elastic demand for the company's products.

Revenue per unit of production is average income and additional income from sales of one more unit of production - marginal income. Due to the fact that a perfectly competitive firm does not affect price, each additional unit of sales adds exactly its price and marginal revenue will be equal to its price, i.e. it will be constant.

Equilibrium of a competitive firm in the short run

In market theory, the following periods are distinguished.

Instantaneous- this is such a short period that the output of each firm and the number of firms in a given industry are fixed.

Short- this is a period during which the production capacity of the company is fixed, but the volume of output can be changed (increased, decreased) by changing the volume of use variables factors. The total number of firms in the industry remains constant.

Long (long) is the period during which production capacity can be adjusted to demand and cost conditions. The number of enterprises in the industry may change over the long term.

In the short run, a competitive firm does not have enough time to increase its output. Therefore, she must choose the optimal sales volume to maximize profits or minimize losses. This problem can be solved in two ways. First way involves comparing the gross income received and gross costs. This path makes it possible to check general profitability optimal output volume in a short period. Second way means a comparison of marginal revenue and marginal cost to test the same output parameter ultimate profitability.

The equilibrium of a competitive firm in a short period is illustrated in Fig. 25.1.

Rice. 25.1. Equilibrium in the short period

In Fig. 25.1 shows that the equilibrium price and output in the short period are equal to Pf and Qf, respectively. At a given price, a competitive firm will achieve output at the level of Q f (P = MC) and receive excess profit (P f XYZ).

Long-run equilibrium of a competitive firm

In the long run, all production resources are mobile, so new firms can enter an industry if profits in this industry are higher compared to other industries. On the contrary, when firms make lower than normal profits, they exit the industry. In the long run, all types of costs are completely variable. Firms produce products only if the price is not lower than long-term average costs:

The long-run optimal output of a competitive firm is shown in Fig. 25.2.

Rice. 25.2. Equilibrium in the long run

A firm is an organization that uses resources to produce goods and services for profit, owning and managing one or more enterprises. From the point of view of ownership, three forms of firms can be distinguished: sole proprietorship, partnership, corporation. A sole proprietorship is a type of business where the owner and manager are one person. Partnership is a business where the owner of the company is two or more persons. A corporation is a type of business in which many individuals come together to jointly operate as a single entity. entity. The role of small and medium-sized firms in a competitive environment is reduced to servicing concerns, supplying them with parts, and providing services. A peculiarity of the creation of small and medium-sized firms in Russia is that they arise mainly not in the sphere of material production.

Question 42 Interaction of supply and demand. Market