The firm is in equilibrium in the short run. Equilibrium of the firm in the short and long run in a market of perfect competition. Having bought the factors of production, the entrepreneur provides himself with the opportunity to receive income, since the purchased

Rational behavior for a commercial firm is one that provides maximum possible profit.

The choice of behavior model is determined two main circumstances :

. time factor (short or long period);

. kind of competition (perfect or imperfect).

IN A SHORT PERIODif it is required to increase production, the firm can achieve this, increasing only the variables (labor, materials, raw materials, etc.). The firm has no time to change the constant factors (the size of the structures, the number of cars).

IN A LONG PERIOD the behavior of the firm is different: in response to a constantly changing level of production, it has the ability to change all factors of production... Therefore, they all become variable. During this period, the firm seeks to minimize costs by combining factors, replacing labor with capital and vice versa.

The influence of the type of competition on the behavior of the firm is more complex.

Consider the rational behavior of the firm in conditionsPERFECT COMPETITION.

In a market of perfect competition, none of the firms influences on the price of their products. What can an entrepreneur do to maximize profits? He can only change the volume of production. Then the question arises: how much product should the firm produce and sell to get the maximum profit? To find the answer to this question, it is necessary to compare the market price of a product and the marginal cost of the firm. If the firm increases its production by one, two, three, etc. units, then each subsequent unit (say, each new TV) will add something to both total income and total costs. It is something" - ultimateincomeand marginal cost.

If marginal revenue is greater than marginal cost, then each new television produced adds more to total revenue than it adds to total cost. Hence, the difference between the marginal income (marginal revenue — MR) and marginal costs (marginal cost - MS),i.e. profit (profit - R), -increases:

P = MR- MC.

The opposite happens when marginal cost is higher than marginal revenue.

Output:the maximum total profit is reached whenthere is equality between price and marginalcosts: R \u003d MC.

If R > MS, then production needs to be expanded.

If R< МС, then production must be reduced.

The equilibrium point of the firm and the maximum profit is reachedin the case of equality of marginal revenue and marginal cost.

When a company has reached such a ratio, it will not increase production, the output will be stable, hence the name Firm equilibrium: MC= MR.

Rational behavior of the firmin conditions of IMPERFECT COMPETITION OTHER.

In a monopolistic market, a firm influences the price of its products.

If in the market of perfect competition the additional income from sales of successive units of production is unchanged and equal to the market price, then in a monopolistic market an increase in sales lowers the price, and hence the additional, i.e., marginal, income (marginal revenue — MR). This arises because in a saturated market, the monopolist can increase production only by lowering prices.

Exists two ways to determine the volume of production at which the company will receive the maximum profit .

In the first methodcompare gross income and gross costs for each volume of production.

With the second methoddetermine the optimal production volume by comparing marginal revenue and marginal cost.

Output:in order to get the maximum profit in an imperfect competition, the volumes of production and sales should be increased until the marginal costs associated with the production of each additional unit of output are less than the marginal income received from the sale of this unit of output: if MR\u003e MC,production should be expanded; if MR< МС, production should be reduced; if MR \u003d MC,the firm gets the maximum profit.

Equilibrium means a state of the market that, at a certain price, is characterized by an equilibrium of supply and demand.

Equilibrium of the firm in the short run.

In conditions of perfect competition, the firm cannot influence the prices of the goods sold. Its only opportunity to adapt to changes in the market is to change the volume of production. In the short run, the number of individual factors of production remains unchanged. Therefore, the firm's stability in the market, its competitiveness will be determined by how it uses variable resources.

There are two general rules that apply to any market structure.

First rule states that it makes sense for a firm to continue operating if, at the achieved level of production, its income exceeds variable costs. The firm should stop production if the total income from the sale of the product it produces does not exceed (or at least not equal to) variable costs.

Second rule determines that if a firm decides to continue production, then it must produce such a quantity of products at which the marginal income is equal to the marginal cost.

Based on these rules, it can be concluded that the firm will introduce such a number of variable factors that, for any volume of production, it will equalize its marginal costs with the price of the product. Moreover, the price must exceed the average variable costs. If the market price of the goods produced by the firm and production costs remain unchanged, then it makes no sense for the firm maximizing its profit to either decrease or increase production. In this case, the firm is considered to have reached an equilibrium point in the short run.

Equilibrium of the firm in the long run. Equilibrium conditions of the firm in the long run:

the marginal cost of the firm must equal the market price of the product;
the firm should receive zero economic profit;
the firm is unable to increase profits by unlimited expansion of production.

These three conditions are equivalent to the following:

firms in the industry produce products in volumes corresponding to the minimum points of their curves of average total costs in the short run;
for all firms in the industry, their marginal production costs are equal to the price of the goods;
firms in the industry produce products in volumes corresponding to the troughs of their long-run average cost curves.

In the long run, the level of profitability is the regulator of the resources used in the industry.

When all firms in an industry operate with minimal costs in the long run, the industry is considered to be in equilibrium. This means that at a given level of technology development and constant prices for economic resources, each company in the industry completely depletes internal reserves for optimizing production and minimizes its costs. If neither the level of technology nor the prices of factors of production change, then any attempt by the firm to increase (or decrease) the volume of production will lead to losses.

Least Cost Rule. Principles of maximizing profits in a perfect competition.

Least Cost Rule - a condition according to which costs are minimized in the case when the monetary unit spent on each resource gives the same return - the same marginal product. In this case, an optimal combination of production factors is achieved.

The firm chooses the level of production at which it makes the most profit. If the production of an additional unit of output leads to an increase in gross income, then the firm must increase production. Thus, the firm should be guided by the rule - to increase production to a level where marginal income is equal to marginal costs. This rule is respected in an environment of perfect competition. A firm operating in a perfect market can control only one parameter - the volume of production. The price of goods and resources is formed by the market. Conclusion: The resource will be used as long as the marginal performance is not lower than the price. This means that the resource price measures the marginal productivity of these factors. Performance will be maximized on your income. All factors in monetary terms are equal to their prices.

Modern economic theory claims that profit maximization or cost minimization is achieved when marginal revenue is equal to marginal cost (MR \u003d MC). Let's consider this condition in more detail. Let us postpone the quantity of products on the abscissa axis, and total income and costs on the ordinate axis. Total income is a straight line starting from the origin, and total costs are obtained by summing the curves of fixed and variable costs.

By connecting both graphs, it is easy to understand the extent to which the income-generating activities of the enterprise vary. The maximum profit is made when the gap between TR and TC is the largest (segment AB). Points C, D - points of critical volume of production. That point C after point D total costs exceed total income (TC\u003e TR), such production is economically unprofitable and therefore impractical. It is in the production interval from point K to point N that the entrepreneur makes a profit, maximizing it with an output equal to OM. Its task is to gain a foothold in the immediate vicinity of point B. At this point, the angular coefficients of income (MR) and total costs (MC) are equal: MR \u003d MC. Thus, the condition for maximizing profit is the equality of marginal revenue to marginal costs.

In conditions of short-term equilibrium, four types of firms can be distinguished. The firm that manages to cover only average variable costs (AVC \u003d P) is called the marginal firm. Such a company manages to be “afloat” only for a short time (short term). If prices rise, it will be able to cover not only current (average variable costs), but all costs (average total costs), i.e. receive a normal profit (like an ordinary pre-marginal firm), where ATC \u003d P.

In the event of a decrease in prices, it ceases to be competitive, since cannot even cover current costs and will be forced to leave the industry, being outside of it. If the price is higher than the average total costs, then the firm, along with normal profits, receives excess profits.

There are two general rules that apply to any market structure.

First rule states that it makes sense for a firm to continue operating if, at the achieved level of production, its income exceeds variable costs. The firm should stop production if the total income from the sale of the goods it produces does not exceed (or at least is not equal to) variable costs.

Second rule determines that if a firm decides to continue production, then it must produce such a quantity of products at which the marginal income is equal to the marginal cost.

Based on these rules, it can be concluded that the firm will introduce such a number of variable factors that, for any volume of production, it will equalize its marginal costs with the price of the product. Moreover, the price should exceed the average variable costs. If the market price of the goods produced by the firm and the production costs remain unchanged, then it makes no sense for the firm maximizing its profit to either decrease or increase production. In this case, the firm is considered to have reached an equilibrium point in the short run.

Equilibrium of the firm in the long run. Equilibrium conditions of the firm in the long run:

1) the marginal costs of the firm should be equal to the market price of the product;

2) the firm must receive zero economic profit;

3) the firm is unable to increase profits by unlimited expansion of production.

These three conditions are equivalent to the following: 1) firms in the industry produce output in volumes corresponding to the minimum points of their curves of average total costs in the short run;

2) for all firms in the industry, their marginal production costs are equal to the price of the goods;

3) firms in the industry produce products in volumes corresponding to the minimum points of their curves of average costs in the long run.

In the long run, the level of profitability is the regulator of the resources used in the industry.

When all firms in the industry operate with minimal costs in the long run, the industry is considered to be in equilibrium. This means that at a given level of technology development and constant prices for economic resources, each company in the industry completely depletes internal reserves for optimizing production and minimizes its costs. If neither the level of technology nor the prices of factors of production change, then any attempt by the firm to increase (or decrease) the volume of production will lead to losses.

QUESTION # 15

Decreasing returns: as the use of a production factor increases (with the remaining production factors being fixed), a point is eventually reached where additional use of this factor leads to a decrease in output.

Starting from a certain moment, the successive addition of units of a variable resource (for example, labor) to an unchanging, fixed resource (for example, capital or land) gives a decreasing additional, or marginal, product per each subsequent unit of a variable resource.

The law of economies of scale is manifested in the fact that with an increase in the program for the production of products or the performance of any work (up to the optimal value), the conditionally constant (or indirect) costs, which include plant-wide and general-shop, decrease per unit of production, respectively, reducing its cost ... At the same time, the quality of the products increases.

Studies show that the production program can be increased by increasing the market share by increasing the competitiveness of products, performing a set of work on the unification and aggregation of homogeneous products. Due to economies of scale, the cost of the same type of product can be reduced by up to two times, and the quality of its manufacture can be increased up to 40%.

The optimal ratio of production factors.

It is important to understand which combination of factors will maximize profit in the long run, when all resources are variable.

Least Cost Rule. To minimize the total cost of a given output, the firm must use such a combination of resources that the last dollar spent on the acquisition of each resource accounts for the same amount of output. This means that when using different resources (Xa, Xb, Xc ... Xn), their combination should be such that

However, this equality is correct for perfect competition. In an imperfectly competitive environment, the firm must keep in mind the marginal resource cost (MRC), not the supply price (Px).

To get the maximum profit from the planned output, firms must produce at the lowest cost. Firms spend money on factors of production, and the cost-optimal combination of these factors corresponds to the minimum cost. Let's see how firms manage to find the optimum. We will begin our consideration with the case when two factors are variables, let them be labor and capital. To explain the approach to solving the problem, we use graphical tools. We need two types of lines - iso quanta and isocosts. Isoquants. The word "isoquanta" comes from the English quantity (quantity) with the prefix iso (equal) and means equal quantity. In our case, these are lines built in labor-capital coordinates, which combine combinations of factors of production that ensure the output of the same volume of the final product, say, product X. Both factors of production are measured by their value. Suppose any amount of labor can be replaced by capital and, conversely, any amount of capital can be replaced by labor. This means that a given quantity of a product can be produced with a wide variety of combinations of labor and capital. In fig. 2.4 the bottom curve combines the combinations of factors at which the output Q1 can be obtained. The vertical axis shows the amount of capital in units of monetary costs for it, along the horizontal axis - the amount of labor, also in monetary units. Points A and B show two possible combinations of labor and capital at volume Q1. The Q2 line displays combinations of these factors for more output, and the Q3 line corresponds to even more output. All curves shown in the figure are isoquants.

An isoquant is a line that combines various combinations of two factors of production, making it possible to produce a given volume of products with the effective use of both factors. Isoquants have three important properties: they cannot intersect, they always have a negative slope, and their convex side faces the origin. These properties are very simple to explain. Let's imagine that two isoquants crossed, as shown in Fig. 2.5. Then the point of their intersection would represent a combination of labor and capital, at which, efficiently using available resources, it would be possible to produce different volumes of goods or services. Obviously, this is contrary to common sense. The nature of the negative slope of isoquants is also clear. Since these lines reflect the relationship between factors of production, provided that both factors are used effectively, a decrease in one of them must be compensated for by an increase in the other. The location of isoquants with the convex side towards the origin is due to the fact that labor and capital cannot ideally replace each other. While production is little automated and a lot of labor is used, replacing people with machines is much easier than when most of the processes have already been transferred to machines. For example, replacing 10 loaders with one forklift truck with one operator is not difficult and relatively inexpensive. But replacing a forklift with an operator with a fully automatic forklift, that is, replacing the only remaining employee with an automatic, is a much more difficult task. Consider an example of the relationship between labor and capital, shown in Fig. 2.6, and make sure that the shape of the depicted line corresponds to our logic. It follows from the figure that with the initial capital volume of the fixed assets, its growth by the value of ВС allows replacing EF units of labor, and with a larger initial capital value (0В), the same increase (AB) makes it possible to replace a significantly smaller amount of labor (DE). Note that the slope of the isoquant indicates the ratio in which capital can be replaced by labor (or vice versa) while maintaining the volume of output.

QUESTION # 16

MARKET MODEL.

Market relations have a constant influence on the development of production through supply and demand. However, this influence is not limited to the role of price and pricing. Market models have a huge impact on production, distribution, and exchange of material goods in society.

There are four market models - these are:

1. Pure competition - characterized by a large number of independent firms producing a standardized product. In pure competition, firms and resources in their movement can move from one industry to another, i.e. can move from the production of one product to the production of another product.

2. Pure monopoly - a monopolist is one who is the only manufacturer of a product that has no close substitutes. Such a monopolist strives to get the maximum total profit, and not profit in the aggregate amount per unit of output. Occupying a special position in the market, a pure monopolist has the ability to set higher prices.

3. Free competition - enables a commodity producer to resort to the most effective way of survival - the use of more advanced equipment, technology, organization and management of production activities. This side in the market competition is gaining universal significance, since all producers of goods understand the role of labor productivity and seek to resort to this measure everywhere.

4. Monopoly - as a special state of a supplier of goods or services, characterized by the fact that the seller has the ability to dictate his terms of sale of goods Monopolies, mastering the laws of supply and demand, establish two types of price monopolization: high and low. Prices of this kind are designed to receive excess profits for the monopoly without making any improvements in the production of goods.

Market and competition are inextricably linked. There is no market without competition. Competition - This is a characteristic feature of the relationship between sellers or between buyers.

Competition, as it appears to economists, means the following:

1. The presence on the market of a large number of independently acting buyers and sellers of any particular product or resource.

2. Freedom for buyers and sellers to enter or leave certain markets.

Perfect, free or pure competition - an economic model, an idealized state of the market, when individual buyers and sellers cannot influence the price, but form it by their contribution of supply and demand. In other words, it is a type of market structure where the market behavior of buyers and sellers is to adjust to the equilibrium state of market conditions.

Signs of perfect competition.

How does a firm determine the price of its product and the volume of production? After all, it would seem that the higher the company sets the price and the greater the volume of products it produces, the more profit it will receive. However, not all so simple. Let us consider, on the basis of which the firm makes decisions, taking into account the line of behavior of the enterprise in various market structures.

and) In perfect competition

In conditions of pure competition, the demand for the products of one firm will be perfectly elastic, since the share of each firm in the market is so insignificant that it cannot affect either the market price or the market volume of production. Consequently, the demand curve for the firm's products is always horizontal.

The firm's proposal will be represented by the marginal cost curve. And since in conditions of perfect competition the price, marginal income and average income are equal, it is possible to derive a condition on which the firm is guided when choosing the volume of production, i.e. P \u003d AR \u003d MR \u003d MC.

Moreover, this rule is valid both in the short term and in the long term. In a short-term equilibrium, a competitive firm can have a profit or loss. Consider various options for short-term equilibrium in Fig. 54.

In fig. 54a and 54b show firms that make a profit: Fig. 54a - the firm has an economic profit, fig. 54b - the firm has a normal profit. In these cases, the firm fully covers the costs, has a profit and wants to maintain this position as long as possible. In fig. 54c and 54d depict firms that have losses. Moreover, if the firm in Fig. 54d covers its current costs (i.e., costs for raw materials, materials, wages for workers), AVC costs are less than the price, it can hope for a price increase in the future and stabilization of its position, then the firm in Fig. 54b does not even cover its variable costs and is forced to close.

Thus, in the short run, in perfect competition, a firm is in equilibrium when it produces such a volume of output at a given - market price, at which the firm either maximizes profits or minimizes losses.

Figure: 54. Equilibrium of the firm

In the long run, the equilibrium condition of the firm can be written as: МR \u003d МС \u003d АС-Р, i.e. in the long run, the firm receives only normal profits, since in the conditions of free entry and exit from the industry and the availability of complete information about the product from manufacturers and buyers, too high profits attract other firms into production, and unprofitable firms leave the industry or go bankrupt, and then in the industry equilibrium is established: neither profit nor loss (see Fig. 55).

Consider now the opposite situation, when there is only one seller of a product on the market that has no substitutes.

b) Monopoly

If, in conditions of perfect competition, the firm needs to choose only the volume of production, since the price is set in the market and is a given value, the monopolist determines both the volume of production and the price at which profit is maximized.

Let us analyze the behavior of a monopolist firm in the short run. The demand curve for it is the market demand curve, which has a negative slope (compare for a competitive firm, where the demand curve is absolutely elastic, and at the same time this curve also acted as a line of average and marginal income). Consequently, the monopolist must take into account that the demand of his firm is imperfectly elastic. If he raises the price, he will lose some of his customers; if he lowers the price, he will be able to sell more. Thus, by setting a particular sales volume, the monopolist simultaneously sets the price.

Figure: 55. Perfect competition in the long runa

Figure 56a shows how the monopolist determines the price P m and the volume of production Q m, and what the price P c and the volume of production Q c would be in the conditions of perfect competition, where P c \u003d MC.

In fig. 56b shows the equilibrium of a profit-maximizing monopolist firm. The volume of production Q m is such that the marginal income curve intersects with the marginal cost curve, and the monopolist's price will be the price corresponding to this volume. Then the conditions for maximum profit under monopoly conditions:

The monopolist always sets a price that is higher than its marginal cost. Three conclusions can be drawn from the above:

1) the monopolist does not set the maximum possible price that he would like to receive;

2) follows from the previous: the monopolist avoids the inelastic part of the demand curve when choosing a decision on the volume of sales and price (try to prove with a numerical example that while MR\u003e 0, demand is elastic and the gross income curve is increasing, and vice versa, as soon as MR<0, а спрос неэластичен, то валовой доход начинает падать);

Figure: 56. Equilibrium in a monopoly

3) when the firm is in equilibrium MS<Р m . Этой разницей иногда пользуются для определения степени монопольного влияния фирмы с помощью lerner index:

The higher the Lerner index, the higher the monopoly power of the firm and the weaker the elasticity of demand will be.

It should be noted that a monopoly position in itself does not guarantee a firm always receiving positive profits. The situation shown in Fig. 56b, when buyers do not want to pay such a price for products that would provide the monopolist with coverage of the costs of producing these products. In this case, the volume of production Q m, at which MC \u003d MR, provides the monopolist with minimization of losses.

For a long-run monopoly firm, it expands its operations until a quantity of goods is produced that matches the equality of marginal revenue and long-run marginal cost.

If a monopolist can obtain an economic profit at a fixed price, then, consequently, free entry to the market for any other sellers is impossible. If there were free entry, it would be impossible to maintain the monopoly for a long period, since the emergence of new firms would increase the supply, which lowered the price to a level that allows only normal profits.

at) In the face of monopolistic competition

Having analyzed the equilibrium conditions for firms in the opposite situation, i.e. pure competition and pure monopoly, which are extremely rare in real life, one can easily analyze the equilibrium of firms existing in real life.

By determining the demand curve of a firm operating in a monopolistic competition, it can be stated that it will be less elastic than the demand curve of a competitive firm, and more elastic than the demand curve of a monopolist. The degree of elasticity also depends on both the number of competitors and the depth of differentiation of a product or service. And the negative slope of the demand curve means that less goods are produced under conditions of monopolistic competition than under conditions of perfect competition.

The firm's supply curve is represented by the marginal cost curve.

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Equilibrium of the firm in the short and long run

A competitive firm can be in a variety of positions in an industry. It depends on what its costs are in relation to the market price of the good that the firm produces. In economic theory, three general cases of the ratio of the average costs (AC) of the firm and the market price (P) are considered, which determines the position of the firm in the industry in the short term - the presence of losses, the receipt of normal profits or excess profits.

In the first case, we observe an unsuccessful, ineffective firm incurring losses: its costs AC are too high in comparison with the price of goods P in the market and do not pay off. Such a firm should either modernize production and reduce costs, or leave the industry.

Figure: 6.8. Loss-making firm

In the second case, the firm achieves equality between average costs and price (AC \u003d P) at the volume of production Q e, which characterizes the equilibrium of the firm in the industry. After all, the function of average costs of the firm can be considered as a function of supply, and demand, as we remember, is a function of price (P). This is how equality between supply and demand is achieved, i.e. equilibrium. The volume of production Q e in this case is equilibrium. Being in a state of equilibrium, the firm receives only normal profit, including accounting, and the economic profit is zero. The presence of a normal profit provides the firm with a favorable position in the industry.

Lack of economic profit creates an incentive to search for competitive advantages - for example, the introduction of innovations, more advanced technologies, which can further reduce the company's costs per unit of production and temporarily provide excess profit.

Figure: 8.8. Firm that receives excess profits

However, it is possible to more accurately determine the moment when the increase in production should be stopped, so that profit does not grow into losses, as, for example, when the volume of output is at the level of Q 3. To do this, it is necessary to compare the marginal cost (MC) of the firm with the market price, which for a competitive firm is simultaneously the marginal revenue (MR). Recall that marginal costs reflect the individual cost of producing each successive unit of goods and change faster than average costs. Therefore, the firm reaches the maximum profit (with MC \u003d MR) much earlier than the average costs become equal to the price of the goods.

The condition of equality of marginal costs to marginal revenue (MC \u003d MR) is production optimization rule.

Compliance with this rule helps the firm not only maximize profits, but also minimize losses.

So, a rationally operating firm, regardless of its position in the industry (whether it suffers losses, whether it receives normal profits or excess profits), should produce only the optimal volume of products. This means that the entrepreneur will always stop at such a volume of output at which the cost of producing the last unit of the commodity (i.e., MC) coincides with the amount of income from the sale of this last unit (i.e., with MR). Let us emphasize that this situation characterizes the behavior of the firm in the short run.

In the long run, industry supply changes. This is due to an increase or decrease in the number of market participants. If the equilibrium price prevailing in the industry market is higher than average costs and firms receive excess profits, then this stimulates the emergence of new firms in a profitable industry. The influx of new firms expands the industry offer. An increase in the supply of goods in the market leads to a decrease in prices. Falling prices automatically reduce firms' excess profits.

Prices move up and down, each time passing through such a level at which P \u003d AC. In this situation, firms do not incur losses, but neither do they receive excess profits. This long-term situation is called equilibrium.

Under equilibrium conditions, when the demand price coincides with the average costs, the firm produces according to the optimization rule at the level MR \u003d MC, i.e., it produces the optimal volume of output.

Thus, equilibrium is characterized by the fact that the values \u200b\u200bof all parameters of the firm coincide with each other:

Since MR of a perfect competitor is always equal to the market price P \u003d MR, the equilibrium condition for a competitive firm in the industry is the equality

The position of the perfect competitor in achieving equilibrium in the industry is shown in the following figure.

Figure: 9.8. The firm in equilibrium

The price function (market demand) P for the firm's products passes through the intersection point of the AC and MC functions. Since in perfect competition the marginal revenue function MR of the firm coincides with the demand (or price) function, the optimal production volume Q opt corresponds to the equality AC \u003d P \u003d MR \u003d MC, which characterizes the position of the firm in equilibrium (at point E). We see that the firm does not receive either economic profit or loss in the conditions of equilibrium that develops during long-term changes in the industry.

In the long-run (LR - long-run) period, the fixed costs of the FC firm increase when its production potential grows. In the long term, expanding the size of the firm with the appropriate technology produces economies of scale. The essence of this effect is that the long-term average costs of LRAC, having decreased after the introduction of resource-saving technologies, cease to change and remain at a minimum level as the output grows. When the economies of scale are exhausted, average costs begin to rise again.

The behavior of average costs in the long run is shown in Figure 10.8, where economies of scale are observed when the volume of production changes from Q a to Q b. Over the long term, the firm changes its scale in search of the best output and lowest cost. According to the change in the size of the firm (the volume of production capacity), its short-term costs of the AU change. The various options for the size of the firm, depicted in Figure 10.8 as short-term ASs, give an idea of \u200b\u200bhow a firm's output may change over the long run (LR). The sum of their minimum values \u200b\u200bis the firm's long-run average cost (LRAC).

Figure: 10.8. Average costs of the firm in the long run

In the long run, the best scale of the firm will be the one at which short-run average costs reach the minimum level of long-run average costs (LRAC). Indeed, as a result of long-term changes in the industry, the market price is set at the LRAC minimum. Thus, the firm reaches long-term equilibrium. In conditions of equilibrium in the long run, the minimum levels of short-term and long-term average costs of the firm are equal not only to each other, but also to the price prevailing in the market. The position of the firm in a state of long-term equilibrium is depicted in Figure 11.8.

Figure: 11.8. Position of the firm in a long-term equilibrium

In the long run, the equilibrium of a competitive firm is characterized by the fact that the optimal volume of production is achieved when the equality P \u003d MC \u003d AC \u003d LRAC is observed.

Under these conditions, the firm finds the optimal scale of production capacity, that is, optimizes the long-term output.

Note that economic profits in a perfectly competitive environment are short-term. In a state of long-term equilibrium, the firm makes only normal profits.

In this position, the average and marginal costs of the firm coincide with the equilibrium price in the industry, which has developed when the general industry supply and demand are equalized. Note also that the condition for maximizing profits is the equality of marginal revenue and marginal costs and the maximum gap between total income and total costs.

TOPIC: CONDUCT OF THE COMPANY IN THE CONDITIONS OF PERFECT COMPETITION

1. Perfect competition: signs, advantages and disadvantages

The competitiveness of a large number of small business entities, when none of them is able to have a decisive influence on the general conditions for the sale of a homogeneous product in a given market is called perfect competition. The perfect competition model is characterized by five features or assumptions:

1. Uniformity of products sold. All units of the product in the view of the buyer are exactly the same. The buyer does not have the ability to recognize who produced the goods. The aggregate of all enterprises producing homogeneous products forms an industry.

2. The presence of a large number of economic agents (sellers and buyers). A large number means that even large buyers and manufacturers represent such volumes of supply and demand that are negligible on a market scale.

3. Free entry to and exit from the market, that is, the absence of any barriers.

4. Perfect informability of sellers and buyers about goods and prices, that is, market participants have perfect knowledge of all market parameters, since information is disseminated instantly.

Equilibrium of the firm

None of the buyers and sellers are able to influence the market price, since the share of each firm in the market of the industry is insignificant, so the demand curve of an individual firm is horizontal (that is, completely elastic). A perfect competitor can sell any number of products at the price set in the market. Moreover, the additional income received from the sale of each additional unit of production exactly corresponds to its market price.

Figure: 1.9 Demand for a Competitive Firm

Let's highlight the merits of perfect competition:

1) Perfect competition forces firms to produce products with minimal average costs and sell them at a price corresponding to these costs. Graphically, this means that the average cost curve only touches the demand curve (see figure 11.8 The position of the firm in long-run equilibrium in topic 8). If the cost of producing a unit of output were higher than the price (AC\u003e P), then any product would be economically unprofitable, and firms would be forced to leave the industry. If the average costs were below the demand curve, and, accordingly, prices (AC< P), это означало бы, что кривая средних издержек пересекает кривую спроса и образуется некий объем производства, приносящий сверхприбыль. Приток новых фирм свел бы эту прибыль на «нет». Таким образом, кривые только касаются друг друга, что и создает ситуацию длительного равновесия.

2) Perfect competition helps to allocate limited resources in such a way as to achieve maximum satisfaction of needs. This is ensured when P \u003d MC. This provision means that firms will produce the maximum possible amount of output until the marginal cost of the resource is equal to the price at which it was bought. This achieves not only high efficiency of resource allocation, but also maximum production efficiency.

The disadvantages of perfect competition include:

1) Perfect competition does not provide for the production of public goods, which, although they bring satisfaction to consumers, cannot be clearly divided, evaluated and sold to each consumer separately (by the piece). This applies to public goods such as fire safety, national defense, etc.

2) Perfect competition, involving a huge number of firms, is not always able to provide the concentration of resources necessary to accelerate scientific and technological progress. This, first of all, concerns basic research (which, as a rule, are unprofitable), science-intensive and capital-intensive industries.

3) Perfect competition promotes product unification and standardization. It does not fully take into account the wide range of consumer choice. Meanwhile, in a modern society that has reached a high level of consumption, a variety of tastes are developing. Consumers are increasingly taking into account not only the utilitarian purpose of a thing, but also pay attention to its design, design, the ability to adapt it to the individual characteristics of each person. All this is possible only under conditions of differentiation of products and services, which is associated, however, with an increase in production costs.

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Equilibrium of the firm in the short and long run.

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Equilibrium means a state of the market that, at a certain price, is characterized by an equilibrium of supply and demand.

Equilibrium of the firm in the short run.

There are two general rules that apply to any market structure.

First rule states that it makes sense for a firm to continue operating if, at the achieved level of production, its income exceeds variable costs. The firm should stop production if the total income from the sale of the goods it produces does not exceed (or at least is not equal to) variable costs.

Second rule determines that if a firm decides to continue production, then it must produce such a quantity of products at which the marginal income is equal to the marginal cost.

Based on these rules, it can be concluded that the firm will introduce such a number of variable factors that, for any volume of production, it will equalize its marginal costs with the price of the product. Moreover, the price should exceed the average variable costs. If the market price of the goods produced by the firm and the production costs remain unchanged, then it makes no sense for the firm maximizing its profit to either decrease or increase production. In this case, the firm is considered to have reached an equilibrium point in the short run.

Equilibrium of the firm in the long run. Equilibrium conditions of the firm in the long run:

1. the marginal costs of the firm should be equal to the market price of the product;

2. the firm must receive zero economic profit;

3. the firm is unable to increase profits by unlimited expansion of production.

These three conditions are equivalent to the following:

1.Firms of the industry produce products in volumes corresponding to the minimum points of their curves of average total costs in the short run;

2. for all firms in the industry, their marginal production costs are equal to the price of the goods;

3. Firms in the industry produce products in volumes corresponding to the minimum points of their curves of average costs in the long run.

In the long run, the level of profitability is the regulator of the resources used in the industry.

QUESTION 36.

Imperfect competition

Imperfect competition - competition in an environment where individual producers have the ability to control the prices of the products they produce. Unlike the market model of perfect competition, which is an abstraction and practically does not exist in real life, but only in theory, the market of imperfect competition is found almost everywhere. Most real markets in a modern economy are imperfectly competitive markets.

Signs of imperfect competition:

· The presence of barriers to entry into the industry;

· Product differentiation;

· The main share of sales falls on one or several leading manufacturers;

· The ability to control fully or partially the price of their products.

In conditions of imperfect competition, the equilibrium of the firm (i.e. when MC \u003d MR) will occur when average costs do not reach their minimum level, and the price is higher than average costs:

(MC \u003d MR)< AC < P

There are many examples of imperfect competition markets. These include the market of carbonated drinks led by the leading companies Coca-Cola and Pepsi, the car market (Toyota, Honda, BMW, etc.), the market for household appliances and electrical appliances (Samsung, Siemens, Sony), etc.

Monopolistic competition is a market structure in which goods and services are sold by many sellers, and each of them is a monopolist, since it sells goods with unique properties.

Another type of market structure currently prevalent is oligopoly. This term is used to describe a market dominated by several (approximately 3 to 5) large firms. In the world market, the most striking examples of oligopoly are modern automobile and computer firms.

When the structure of the market changes from a situation with a large number of firms selling differentiated goods and services to a situation with several firms dominating the market, economists say the level of market concentration has changed.
Market concentration is a measure of the share of the four largest firms in the total volume of similar goods and services.
An oligopoly is formed at a production concentration of at least 60%.

This means that the 4 largest firms supply 60% of the industry's products to the market.

Oligopoly is a market structure in which goods are sold by a limited number of sellers (from 3 to 5).

There is another common type of market structure - monopoly. Pure monopoly is rare, as is perfect competition.

1. Equilibrium of the firm in the short run

This is because in most countries the formation of such monopolies is hindered by antitrust laws.

A legal monopoly is a monopoly permitted by law.
Legal monopolies include firms owned by the state. In Russia, this is the most widespread type of monopoly. For example, enterprises providing the population with electricity, gas, water, railroad transport and other vital services are a legal monopoly. Here the state monopoly is necessary, because in this area competition can harm interests.

QUESTION 37.

Monopoly: Determination of price and volume of production.

In the short term, the monopoly firm maximizes profits, either minimizes losses, or makes normal profits.

By maximizing profits, the monopolist chooses a price on the elastic part of the demand curve, and the price must be higher than the average total costs P\u003e AC. He determines the volume of production according to the rule of equality of marginal income and marginal costs МR \u003d МС.

The monopolist, by setting the price and determining the volume of production, seeks not to the highest profit per unit of output, but to maximize the total profit. Under certain conditions, he can increase the total profit through price discrimination, i.e. by assigning different prices to different units of the same product for different buyers. This is feasible when the monopolist will be able to:

1) divide buyers according to the degree of elasticity of demand into groups;

2) restrict freedom of movement of goods between these groups.

The economic consequences of price discrimination are expressed not only in an increase in total profit, but also in the production of a large volume of products.

In a certain situation: for example, a drop in demand, an increase in costs, the monopolist may incur losses. By minimizing losses if the price is lower than the average total cost P<АС, фирма-монополист выбирает также эластичный участок кривой спроса и производит такой объём товара, при котором МR=МС. Ре — цена минимизации убытков.

In the long run, making a profit in an industry (i.e., for a monopoly firm) will depend on the ability to keep the industry under its control from other firms entering it. In the event that the barriers are not surmountable, the monopolist will be able to receive economic profits in the long run. Re is the price that brings economic profit.

QUESTION 36.

Indicators of monopoly power.

Monopoly power is the ability of a firm to influence the price of its product by changing the amount of this product sold in the market.

A pure monopoly has real (complete) monopoly power.

The degree of monopoly power is very relative if not one but several manufacturers of similar products operate in the market.

A necessary prerequisite for monopoly power is a downward sloping demand curve for the firm's output.

To quantitatively characterize monopoly power, the following are used:

- the indicator of Lerner's monopoly power L \u003d (P-MC) / P, which shows the degree of excess of the price of a product over the marginal costs of its production.

0 < L < 1, чем больше L, тем больше монопольная власть фирмы.

- the index of monopoly power (M), which shows the degree of price excess over long-term average costs (LAC): M \u003d (P-LAC) / P;

- Herfindahl – Hirschman index, which determines the degree of market concentration: H \u003d P21 + P22 +… + P2n, where H is the concentration indicator, Pn is the firm's percentage of the market or its share in the industry supply. The maximum value of H is 10000. If H is less than 1000, then the market is considered non-concentrated. If H ³ 1800, then the industry is considered highly monopolized.

QUESTION 38.

Economic consequences of monopoly.

QUESTION 39.

Natural monopoly: essence, regulation problems.

Natural monopoly is the state of the commodity market, in which the satisfaction of demand in this market is more efficient in the absence of competition due to the technological features of production (due to a significant decrease in production costs per unit of goods as the volume of production increases), and the goods produced by the subjects of natural monopoly are not can be replaced in consumption by other goods, in connection with which the demand in a given commodity market for goods produced by the subjects of natural monopolies is less dependent on changes in the price of this good than the demand for other types of goods.

The first component of natural monopoly refers to the material prerequisites of market relations - the production process. It is this process that ensures more or less effective satisfaction of demand in the absence of competition.

2. The second essential component, which clarifies the concept of natural monopolies, is addressed to a natural monopoly commodity. The goods produced by the subjects of natural monopolies cannot be replaced in consumption by other goods, that is, a potential buyer is able to acquire for his own needs only this, and no other goods, and he can buy it only from one specific seller - a natural monopolist.

3. The third component is the most important in terms of legal regulation. It concerns one of the main elements of the market economy - prices: the demand in a given commodity market for goods produced by natural monopoly entities is less dependent on changes in the price of this commodity than the demand for other types of goods. Demand that does not depend or depends to a minimum on the price, its changes, is usually called inelastic.

It is necessary to comply with the following basic rules for regulating the activities of natural monopolies.

- Prices should be as close to marginal cost as possible.

- Profits should only provide a normal rate of return.

- Production must be efficient.

Q 40.

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The firm is in equilibrium in the short run. Equilibrium of the firm in the short and long run in a market of perfect competition. Having bought the factors of production, the entrepreneur provides himself with the opportunity to receive income, since the purchased

456. If the apple market is competitive, then at the point of short-term equilibrium: a)

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Equilibrium of the firm in the short and long run

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