Market perfect competition characterized by the following features:
Firms' products are homogeneous so consumers don't care which manufacturer they buy it from. All products in the industry are perfect substitutes, and the cross-price elasticity of demand for any pair of firms tends to infinity:
This means that any arbitrarily small increase in prices by one producer above the market level leads to a reduction in demand for his products to zero. Thus, the difference in prices may be the only reason for the preference of a particular firm. There is no non-price competition.
The number of economic entities on the market is unlimited and their specific gravity so small that the decisions of an individual firm (individual consumer) to change the volume of its sales (purchases) do not affect the market price product. In this case, naturally, it is assumed that there is no collusion between sellers or buyers to obtain monopoly power in the market. The market price is the result of the combined action of all buyers and sellers.
Freedom to enter and exit the market... There are no restrictions and barriers - there are no patents or licenses limiting activities in the industry, no significant initial investment is required, the positive economies of scale of production are extremely insignificant and do not prevent new firms from entering the industry, there is no government intervention in the supply and demand mechanism (subsidies , tax incentives, quotas, social programs, etc.). Freedom of entry and exit involves absolute mobility of all resources, freedom of their movement geographically and from one type of activity to another.
Perfect knowledge all market participants. All decisions are made in certainty. This means that all firms know their functions of income and costs, the prices of all resources and all possible technologies, and all consumers have complete information about the prices of all firms. This assumes that information is distributed instantly and free of charge.
These characteristics are so strict that there are practically no real markets that would fully satisfy them.
However, the perfect competition model:
- allows you to explore markets in which a large number of small firms sell homogeneous products, i.e. markets close in terms of conditions with this model;
- clarifies the conditions for maximizing profit;
- is the standard for assessing the performance of the real economy.
The short-term equilibrium of a firm in perfect competition
Demand for a perfect competitor's products
In perfect competition, the prevailing market price is established through the interaction of market demand and market supply, as shown in Fig. 1, and determines the horizontal curve of demand and average income (AR) for each individual firm.
Rice. 1. Demand curve for the products of a competitor
Due to the homogeneity of products and the presence of a large number of perfect substitutes, no firm can sell its goods at a price even slightly higher than the equilibrium price, Pe. On the other hand, an individual firm is very small compared to the aggregate market, and it can sell all of its output at Pe, i.e. she does not need to sell the product at a price lower than Pe. Thus, all firms sell their products at the market price Pe, determined by market supply and demand.
Income of a firm - a perfect competitor
The horizontal curve of demand for the products of an individual firm and a single market price (Pe = const) predetermine the shape of the income curves in conditions of perfect competition.
1. Total income () - the total amount of income received by the company from the sale of all its products,
is represented on the graph as a linear function with a positive slope and originating from the origin, since any unit of output sold increases volume by an amount equal to the market price !! Pe ??.
2. Average income () - income from the sale of a unit of production,
is determined by the market price of equilibrium !! Pe ??, and the curve coincides with the demand curve of the firm. By definition
3. Marginal income () - additional income from the sale of one additional unit of output,
The marginal revenue is also determined by the current market price for any given volume of issue.
By definition
All functions of income are shown in Fig. 2.
Rice. 2. Income of a competitor company
Determination of the optimal output volume
In perfect competition, the current price is set by the market, and an individual firm cannot influence it, since it is by the price recipient... Under these conditions, the only way to increase profits is to regulate the volume of output.
Based on the current market and technological conditions, the company determines optimal output volume, i.e. the volume of output that provides the firm profit maximization(or minimization if making a profit is impossible).
There are two related methods for determining the optimum point:
1. The method of total costs - total income.
The total profit of the firm is maximized at such a volume of output when the difference between and will be as large as possible.
n = TR-TC = max
Rice. 3. Determination of the point of optimal production
In fig. 3, the optimization volume is at the point where the tangent to the TC curve has the same slope as the TR curve. The profit function is found by subtracting TC from TR for each production volume. The peak of the total profit curve (n) shows the volume of output at which the profit is maximum in short term.
From the analysis of the total profit function, it follows that the total profit reaches its maximum when the volume of production, at which its derivative is equal to zero, or
dп / dQ = (п) `= 0.
The derivative of the total profit function has a strictly defined economic sense Is the marginal profit.
Marginal profit ( Mп) shows the increase in total profit with a change in the volume of output per unit.
- If Mn> 0, then the cumulative profit function grows, and additional production can increase total profit.
- If Mp<0, то функция совокупной прибыли уменьшается, и дополнительный выпуск сократит совокупную прибыль.
- And, finally, if Mn = 0, then the value of the total profit is maximum.
From the first condition for maximizing profit ( Mp = 0) the second method follows.
2. Method of marginal cost - marginal income.
- Мп = (п) `= dп / dQ,
- (n) `= dTR / dQ-dTC / dQ.
And since dTR / dQ = MR, a dTC / dQ = MC, then the total profit reaches its maximum value for such a volume of output at which the marginal costs are equal to the marginal income:
If the marginal cost is greater than the marginal income (MC> MR), then the company can increase profits by reducing production. If the marginal cost is less than the marginal revenue (MC<МR), то прибыль может быть увеличена за счет расширения производства, и лишь при МС=МR прибыль достигает своего максимального значения, т.е. устанавливается равновесие.
This equality valid for any market structure, however, in conditions of perfect competition, it is somewhat modified.
Since the market price is identical to the average and marginal earnings of the firm - a perfect competitor (PAR = MR), the equality of marginal costs and marginal revenues is transformed into the equality of marginal costs and prices:
Example 1. Finding the optimal volume of output in a perfect competition.The firm operates in a highly competitive environment. Current market price Р = 20 USD The aggregate cost function has the form ТС = 75 + 17Q + 4Q2.
It is required to determine the optimal production volume.
Solution (1 way):To find the optimal volume, calculate MC and MR, and equate them to each other.
- 1.MR = P * = 20.
- 2.MS = (TC) `= 17 + 8Q.
- 3. MC = MR.
- 20 = 17 + 8Q.
- 8Q = 3.
- Q = 3/8.
Thus, the optimal volume is Q * = 3/8.
Solution (2 way):The optimal volume can also be found by equating the marginal profit to zero.
- 1. Find the total income: TR = P * Q = 20Q
- 2. Find the function of total profit:
- n = TR-TC,
- n = 20Q- (75 + 17Q + 4Q2) = 3Q-4Q2-75.
- 3. Determine the marginal profit function:
- Mn = (n) `= 3-8Q,
- and then equate Mn to zero.
- 3-8Q = 0;
- Q = 3/8.
Solving this equation, we got the same result.
Short-term benefit condition
The total profit of an enterprise can be estimated in two ways:
- P= TR-TC;
- P= (P-ATC) Q.
If we divide the second equality by Q, then we get the expression
characterizing the average profit, or profit per unit of output.
It follows from this that the receipt by the firm in the short-term period of profits (or losses) depends on the ratio of its average total costs (ATC) at the point of optimal production Q * and the current market price (at which the firm is forced to trade - a perfect competitor).
The following options are possible:
if P *> ATC, then the firm has a positive economic profit in the short run;
Positive economic profit
In the figure presented, the volume of total profit corresponds to the area of the shaded rectangle, and the average profit (i.e., profit per unit of output) is determined by the vertical distance between P and ATC. It is important to note that at the optimum point Q *, when MC = MR, and the total profit reaches its maximum value, n = max, the average profit is not maximum, since it is determined not by the ratio of MC and MR, but by the ratio of P and ATC.
if P *<АТС, то фирма имеет в краткосрочном периоде отрицательную экономическую прибыль (убытки);
Negative economic profit (loss)
if P * = ATC, then the economic profit is zero, production is break-even, and the firm receives only normal profit.
Zero economic profit
Termination condition
In conditions when the current market price does not bring positive economic profit in the short term, the firm faces a choice:
- either continue unprofitable production,
- or temporarily suspend its production, but incur losses in the amount of fixed costs ( FC) production.
The firm makes a decision on this issue based on the ratio of its average variable costs (AVC) and market price.
When a firm decides to close, then its total revenues ( TR) fall to zero, and the resulting losses become equal to its total fixed costs. So as long as price is higher than average variable costs
P> AVC,
firm production should continue... In this case, the income received will cover all the variables and at least part of the fixed costs, i.e. the losses will be less than at the close.
If the price is equal to the average variable costs
then from the point of view of minimizing losses to the firm indifferently, continue or discontinue its production. However, the firm will most likely continue to operate in order not to lose its customers and keep employees' jobs. At the same time, its losses will not be higher than at the close.
And finally, if prices are less than average variable costs then the firm should cease its activities. In this case, she will be able to avoid unnecessary losses.
Termination condition
Let us prove the validity of these arguments.
By definition, n = TR-TC... If the firm maximizes its profit by producing the n-th number of products, then this profit ( nn) must be greater than or equal to the firm's profit under conditions of enterprise closure ( on), because otherwise the entrepreneur will immediately close his enterprise.
In other words,
Thus, the firm will continue to operate only as long as the market price is greater than or equal to its average variable costs. Only under these conditions does the firm minimize its losses in the short term by continuing to operate.
Interim conclusions on this section:Equality MC = MR and also equality Mp = 0 show the optimal volume of output (i.e., the volume that maximizes profits and minimizes the firm's losses).
The relationship between the price ( R) and average total costs ( ATC) shows the amount of profit or loss per unit of output while continuing production.
The relationship between the price ( R) and average variable costs ( AVC) determines whether or not it is necessary to continue activities in the event of unprofitable production.
Short-term supply curve of a competitor
By definition, supply curve reflects the supply function and shows the number of goods and services that manufacturers are ready to offer to the market at given prices, at a given time and place.
In order to determine the shape of the short-term supply curve, completely competitive firm,
Competitor's supply curve
suppose the market price is Ro, and the curves of average and marginal costs are as in Fig. 4.8.
Insofar as Ro(closing point), then the volume of the firm's supply is zero. If the market price rises to a higher level, then the equilibrium volume of production will be determined by the ratio MC and Mr... The very point of the supply curve ( Q; P) will lie on the marginal cost curve.
Sequentially increasing the market price and connecting the obtained points, we get a short-term supply curve. As can be seen from the presented fig. 4.8, for a perfect competitor firm, the short-term supply curve coincides with its marginal cost curve ( MC) above the minimum level of average variable costs ( AVC). At lower than min AVC the level of market prices, the supply curve coincides with the price axis.
Example 2. Definition of a sentence functionIt is known that a firm-perfect competitor has total (TC), total variable (TVC) costs represented by the following equations:
- TS=10+6 Q-2 Q 2 +(1/3) Q 3 , where TFC=10;
- TVC=6 Q-2 Q 2 +(1/3) Q 3 .
Determine the supply function of the firm in perfect competition.
1. Find MS:
MS = (TC) `= (VC)` = 6-4Q + Q 2 = 2 + (Q-2) 2.
2. Let us equate the MC to the market price (the condition of market equilibrium with perfect competition MC = MR = P *) and get:
2+(Q-2) 2 = P or
Q=2(P-2) 1/2 , if R2.
However, from the previous material, we know that the volume of supply Q = 0 for P
Q = S (P) at Pmin AVC.
3. Determine the volume at which the average variable costs are minimal:
- min AVC=(TVC)/ Q=6-2 Q+(1/3) Q 2 ;
- (AVC)`= dAVC/ dQ=0;
- -2+(2/3) Q=0;
- Q=3,
those. average variable costs reach their minimum for a given volume.
4. Determine what min AVC is equal to by substituting Q = 3 into the min AVC equation.
- min AVC = 6-2 (3) + (1/3) (3) 2 = 3.
5. Thus, the supply function of the firm will be:
- Q=2+(P-2) 1/2 ,if P3;
- Q= 0 if R<3.
Long-term market equilibrium with perfect competition
Long term
So far, we have considered a short-term period, which involves:
- the existence of a constant number of firms in the industry;
- enterprises have a certain amount of permanent resources.
In the long run:
- all resources are variable, which means the possibility for a company operating on the market to change the size of production, introduce new technology, modify products;
- change in the number of enterprises in the industry (if the profit earned by the company is below normal and negative forecasts for the future prevail, the enterprise may close and leave the market, and vice versa, if the profit in the industry is high enough, an influx of new companies is possible).
Key Analysis Assumptions
To simplify the analysis, assume that the industry consists of n typical enterprises with the same cost structure, and that a change in the volume of production of existing firms or a change in their number do not affect resource prices(in the future we will remove this assumption).
Let the market price Р1 is determined by the interaction of market demand ( D1) and market supply ( S1). The cost structure of a typical firm in the short run looks like curves SATC1 and SMC1(fig. 4.9).
Rice. 9. Long-term equilibrium of a perfectly competitive industry
Long-Term Equilibrium Formation Mechanism
Under these conditions, the optimal volume of the firm's output in the short run will be q1 units. The production of this volume provides the firm positive economic profit because the market price (P1) exceeds the firm's average short-term cost (SATC1).
Availability short-term positive profit leads to two interrelated processes:
- on the one hand, a company already operating in the industry seeks expand your production and receive economies of scale in the long run (in accordance with the LATC curve);
- on the other hand, outside firms will begin to show an interest in penetration into the industry(depending on the size of the economic profit, the penetration process will proceed at different rates).
The emergence of new firms in the industry and the expansion of the activities of old ones shifts the market supply curve to the right to the position S2(as shown in Fig. 9). The market price decreases from Р1 before P2, and the equilibrium volume of sectoral production will increase from Q1 before Q2... Under these conditions, the economic profit of a typical firm falls to zero ( P = SATC) and the process of attracting new companies to the industry is slowing down.
If for some reason (for example, the extreme attractiveness of the initial profit and market prospects) a typical firm expands its production to the level of q3, then the sectoral supply curve will shift even further to the right to the position S3, and the equilibrium price will fall to the level P3 lower than min SATC... This will mean that firms will no longer be able to extract even normal profits and a gradual outflow of companies in more profitable areas of activity (as a rule, the least effective ones go).
The remaining enterprises will try to reduce their costs by optimizing the size (i.e., by slightly reducing the scale of production to q2) to the level at which SATC = LATC, and it is possible to get a normal profit.
Displacement of the industry supply curve to the level Q2 will cause the market price to rise to P2(equal to the minimum value of long-term average costs, P = min LAC)... At this price level, the typical firm does not make economic profit ( economic profit is zero, n = 0), and is able to extract only normal profit... Consequently, the motivation for new firms to enter the industry disappears and a long-term equilibrium is established in the industry.
Consider what happens if the industry is upset.
Let the market price ( R) settled below the average long-term costs of a typical firm, i.e. P. Under these conditions, the firm begins to incur losses. There is an outflow of firms from the industry, a shift in market supply to the left, and if market demand remains unchanged, the market price rises to an equilibrium level.
If the market price ( R) is set above the average long-run costs of a typical firm, i.e. P> LATC, then the firm begins to receive a positive economic profit. New firms enter the industry, market supply shifts to the right, and with constant market demand, the price falls to an equilibrium level.
Thus, the process of entering and exiting firms will continue until long-term equilibrium is established. It should be noted that in practice, market regulatory forces work better for expansion than contraction. Economic profit and freedom to enter the market actively stimulate an increase in industrial production. On the contrary, the process of squeezing firms out of an overly expanded and unprofitable industry takes time and is extremely painful for the participating firms.
Basic conditions for long-term equilibrium
- Operating firms make the best use of the resources at their disposal. This means that each firm in the industry maximizes its profits in the short run by producing the optimal volume of output at which MR = SMC, or since the market price is the same as the marginal revenue, P = SMC.
- There is no incentive for other firms to enter the industry. The market forces of supply and demand are so strong that firms are unable to extract more than is necessary to keep them in the industry. those. economic profit is zero. This means that P = SATC.
- Firms in the industry cannot, in the long run, reduce total average costs and make profits by scaling up production. This means that in order to generate a normal profit, the typical firm must produce a volume of output corresponding to the minimum of average long-run total costs, i.e. P = SATC = LATC.
In conditions of long-term equilibrium, consumers pay the lowest economically possible price, i.e. the price required to cover all production costs.
Long-term market supply
The long-term supply curve of an individual firm coincides with the increasing section of the LMC above the min LATC. However, the market (sectoral) supply curve in the long run (as opposed to the short run) cannot be obtained by horizontal summation of the supply curves of individual firms, since the number of these firms varies. The shape of the market supply curve in the long run is determined by how the prices for resources in the industry change.
At the beginning of the section, we introduced the assumption that changes in industrial production volumes do not affect resource prices. In practice, three types of industries are distinguished:
- with fixed costs;
- with increasing costs;
- with decreasing costs.
The market price will rise to P2. The optimal production volume for an individual firm will be Q2. Under these conditions, all firms will be able to earn economic profits by encouraging other companies to enter the industry. The short-term sectoral supply curve moves to the right from S1 to S2. The entry of new firms into the industry and the expansion of industry output will not affect resource prices. The reason for this may be an abundance of resources so that new firms cannot influence resource prices and increase the costs of incumbent firms. As a result, the typical firm's LATC curve will remain the same.
The restoration of equilibrium is achieved according to the following scheme: the entry of new firms into the industry causes the price to fall to P1; profits are gradually reduced to the level of normal profits. Thus, sectoral output increases (or decreases) following changes in market demand, but the supply price remains unchanged in the long run.
This means that the industry with fixed costs appears as a horizontal line.
Industries with increasing costsIf an increase in sectoral volume causes an increase in resource prices, then we are dealing with the second type of sectors. The long-term equilibrium of such an industry is shown in Fig. 4.9 b.
The higher price allows firms to generate economic profits, which attracts new firms to the industry. The expansion of aggregate production necessitates an ever wider use of resources. As a result of competition between firms, resource prices increase, and as a result, the costs of all firms (both existing and new) in the industry increase. Graphically, this means an upward displacement of the typical firm's marginal and average cost curves from SMC1 to SMC2, from SATC1 to SATC2. The short-run firm's supply curve is also shifting to the right. The adjustment process will continue until economic gains run out. In fig. 4.9 the new equilibrium point will be the price P2 at the intersection of the demand curves D2 and supply S2. At this price, the typical firm chooses a production volume at which
P2 = MR2 = SATC2 = SMC2 = LATC2.
The long-term supply curve is obtained by connecting short-term equilibrium points and has a positive slope.
Industries with diminishing costsThe analysis of the long-term equilibrium of industries with decreasing costs is carried out according to a similar scheme. Curves D1, S1 - the initial curves of market demand and supply in the short term. P1 is the initial equilibrium price. As before, each firm reaches equilibrium at q1, where the demand curve - AR-MR touches min SATC and min LATC. In the long run, market demand increases, i.e. the demand curve shifts to the right from D1 to D2. The market price rises to a level that allows firms to generate economic profits. New companies are starting to flow into the industry, and the supply curve is shifting to the right. Expansion of production volumes leads to lower prices for resources.
This is a rather rare situation in practice. An example is a young industry emerging in a relatively undeveloped area, where the resource market is poorly organized, marketing is at a primitive level, and the transportation system is poorly functioning. An increase in the number of firms can increase the overall efficiency of production, stimulate the development of transport and marketing systems, and lower the total costs of firms.
External savingsDue to the fact that an individual firm cannot control such processes, this kind of cost reduction is called external economy(English external economies). It is caused solely by the growth of the industry and by forces outside the control of an individual firm. External economy should be distinguished from the already known internal economies of scale of production, achieved by increasing the scale of the firm's activities and is fully under its control.
Taking into account the factor of external savings, the function of the total costs of an individual firm can be written as follows:
TCi = f (qi, Q),
where qi- the volume of output of an individual firm;
Q- the volume of output of the entire industry.
In industries with fixed costs, there is no external economy, the cost curves of individual firms do not depend on the output of the industry. In industries with increasing costs, negative external economies take place, the cost curves of individual firms shift upward with an increase in output. Finally, industries with diminishing costs experience positive external economies that offset the diminishing returns to scale internal inefficiency so that individual firms' cost curves shift downward as output rises.
Most economists agree that in the absence of technological progress, industries with increasing costs are most typical. Industries with diminishing costs are the least common. As industries with decreasing and constant costs grow and mature, they are likely to evolve into industries with increasing costs. On the contrary, technological progress can neutralize the rise in resource prices and even lead to their fall, which will result in the emergence of a declining long-term supply curve. An example of an industry in which costs are reduced as a result of STP is the production of telephone services.
Perfect competition- competition between manufacturers, sellers of goods, which takes place in the so-called ideal market, where an unlimited number of sellers and buyers of a homogeneous product are presented, freely communicating with each other.
The market of perfect competition is characterized by the following features.
1 . The products of firms are homogeneous, so consumers don't care which manufacturer to buy it from. All products in the industry are perfect substitutes, and the cross-price elasticity of demand for any pair of firms tends to infinity.
This means that any arbitrarily small increase in prices by one producer above the market level leads to a reduction in demand for his products to zero.
In this way, non-price competition on this there is no market, and the difference in prices may be the only reason for the preference of a particular firm.
2. Number of economic entities on the market unlimitedly large, and their share relative to the industry is extremely small. Decisions of an individual firm (individual consumer) to change the volume of its sales (purchases) do not affect the market price product.
The perfect competition model assumes that there is no collusion between sellers or buyers to obtain monopoly power in the market. The market price is the result of the combined action of all buyers and sellers.
3. Freedom of entry and exit on the market. There are no restrictions and barriers - no patents or licenses are required to restrict activities in the industry, significant initial investments, positive economies of scale of production are extremely insignificant and do not prevent new firms from entering the industry, there is no government intervention in the supply and demand mechanism (subsidies, tax incentives, quotas, social programs, etc.).
Freedom of entry and exit involves absolute mobility of all resources, freedom of their movement geographically and from one type of activity to another.
4. Perfect knowledge all market participants. All decisions are made in certainty. This means that all firms know their functions of income and costs, the prices of all resources and all possible technologies, and all consumers have complete information about the prices of all firms. This assumes that information is distributed instantly and free of charge.
These characteristics are so strict that there are practically no real markets that would fully comply with them. Nevertheless, the perfect competition model is an extremely important element of economic analysis. And that's why.
Firstly, the model allows explore markets close to competitive conditions, i.e. markets for relatively homogeneous products in which firms have highly elastic demand and are free to enter and exit the industry.
Secondly, on the example of a competitive market, the main question facing any company is solved: how much output should be produced to maximize its profits, i.e. what are conditions for the economic equilibrium of the firm.
And finally third, the model of perfect competition makes it possible to assess the efficiency of real industries and degree their monopolization.
In conditions of perfect competition, the company offers on the market only a small part of the industry's products.
Suppose a small farm is deciding how much land to plant potatoes next year. It is obvious that the farmer will proceed from the prices prevailing in the market this year. And his decisions to increase or decrease his production will not have any effect on the market price of the goods, determined by the interaction of the aggregate market demand and market offer the item in question.
The perfect competitor is in the market by the price recipient, and his individual demand curve is absolutely price elastic (Fig. 1). As you can see in the chart, the market demand curve (D) decreases (Fig. 1. a), since the more potatoes on the market, the more low prices consumers are ready to buy it. Demand curve (d), that an individual firm is dealing with is a horizontal line because a competing firm can sell additional harvest without reducing the price.
16.1. The economic nature of the market of perfect competition: the essence and main characteristics of the market
The costs of production, discussed in the previous chapter, allow us to find out what may be the minimum costs at which a firm is able to produce a different volume of goods (services). This important information for the firm, since its knowledge will allow in the future to determine the optimal volume of production that will bring the maximum profit to this firm.
The behavior of a firm has its own specifics, depending on what type of market structure the industry belongs to. Consider the behavior of a manufacturer in a market of perfect competition. Within the framework of achieving this goal, the following tasks have to be solved:
1. To characterize the market of perfect competition as a type of market structure.
2. Identify the features of the formation of demand for a firm-perfect competitor.
3. Formulate the rule of profit maximization, which should be guided in its behavior by a firm that is focused on obtaining the highest possible profit.
4. Investigate the behavior of a competitive firm in the short run. Consider all possible directions for her decision-making regarding the volume of production and the supply of economic benefits.
5. Determine the firm's individual supply curve in the short run and the market supply curve.
6. Understand the mechanism of formation of long-term equilibrium in a competitive industry.
7. Explain why in conditions of perfect competition the most efficient use economic resources society.
The key aspects expressing the essence of market relations are the number of economic entities in the market (producers, consumers) and the nature of the connections between them. It is these criteria that determine the structural organization of the market, a specific type of interaction between supply and demand.
Let us dwell on the study of the economic nature of the market for perfect competition. In a perfectly competitive market, all firms are engaged in the production of the same product. An individual firm is so small in relation to the size of the market, that is, to the market volume of production, that its decisions to change the volume of production have absolutely no effect on the market price. Newly created firms have free entry into the industry if they forecast a profit.
The most characteristic feature of this market is a large number of economic entities: both producers and consumers.
In these conditions, each subject, due to the fact that it is negligible economically in relation to the size of the market, is not able to exert any noticeable influence on the formation of the market price.
The products sold on the market are homogeneous. This should be understood so that in the mind of consumers, all units of production are the same. That is, each manufacturer offers a product that is indistinguishable from the product of other manufacturers. Thus, the grounds for non-price competition disappear.
There are no barriers to entry or exit from the market (financial, legal, etc.). The foregoing should be understood as the fact that there are no serious obstacles that could prevent the emergence of new firms in the market or prevent firms operating in it from leaving it. Free entry and exit from the market is ensured by the mobility of production resources, their ability to be smoothly redistributed to more profitable industries at the moment.
The state does not interfere in relations between economic agents. There is no rigid binding of producers and consumers to each other.
Information on the state of market conditions is available to all economic entities. Each manufacturer or consumer has complete information about the price, quantity of the product, costs for it, etc. Knowledge about the parameters of the market is instantly disseminated between market participants and it costs them nothing.
It is pertinent to emphasize that today, in reality, this type of market structure does not actually exist. No real market satisfies all of the above conditions at the same time. The value of studying this type of market organization lies in the fact that it allows us to understand more real market structures, to assess their effectiveness in comparison with this ideal, to understand the mechanism of their functioning and its features. Thus, one should speak, first of all, about the analytical value of studying the market of perfect competition and its certain actual significance.
Considering the economic nature of the market for perfect competition requires an investigation of the demand faced by a competitive firm in the market.
The characteristics of this market given by us are the basis for the assertion that the market price is the result of the coordinated interaction of market demand and market supply. Each individual firm perceives it as given from outside and any volume of production of this firm is not able to change the situation on the market.
Consequently, the demand curve for an individual firm in a competitive market is a horizontal line, precisely because the volume of production of a given firm cannot influence or change the market price in any way. Price is the result of the coordinated interaction of all manufacturing firms and all consumers in the market. This can be graphically interpreted in Figure 16.1.
Rice. 16.1. Formation of demand for a firm - a perfect competitor
The market price is the result of the coordinated interaction of market demand and market supply. The demand curve of an individual firm is a horizontal line because the volume of its production has no effect on the market price.
For further analysis, you should enter the following conventions: P - price; q is the volume of production of a competitive firm; Q is the volume of market production; d - demand for a separate competitive firm; D - market demand; S - market offer; E - market equilibrium, characterized by the market equilibrium price P E and the market equilibrium sales volume Q E.
Further research requires the introduction of a number of indicators into the analysis, such as total income (TR), average income (AR) and marginal income (MR).
Total income can be defined as the product of price and sales of the firm:
(16.1)
Average income shows the income generated by one unit of product sold:
(16.2)
Marginal revenue is defined as the change in total revenue that results from the sale of at least one more additional unit of output:
(16.3)
So, we see that in conditions of perfect competition, price is both average and marginal income. This means that the income from the sale of a unit of production is on average exactly its price, and the income generated by the sale of each additional product is also its price.
16.2. The behavior of the firm as a perfect competitor in the short run. Individual and market offer
The study of the behavior of a competitive firm in the short term should be based on the fact that the firm has the ability to change the volume of application of variable factors of production, that is, to intensify the utilization of production capacities, but cannot change the production capacities themselves.
The firm is not able to influence the price of products, so it focuses all its attention on determining the optimal volume of production, ensuring it receives the highest economic profit.
In the analysis that follows, we will assume that the firm's only goal is to maximize profits (P (q)). Let's compose the target function of the company:
(16.4)
Profit is the difference between total income / TR / and total costs / TC /, the values of which depend on the volume of output. Thus, the profit function of a firm can be represented as
The choice of the optimal volume of output that allows you to get the maximum profit presupposes an algebraic study of the profit function at the extremum / at the maximum /. Therefore, a necessary condition for maximizing profit is the condition:
, (16.7)
since the expression
(16.8)
represents the ratio of the change in total income to the change in the volume of output, that is, the marginal income, and, accordingly, the ratio of the change in total costs to the change in the volume of output is nothing more than the marginal cost
(16.9)
(16.11)
This condition (14.11) of profit maximization is satisfied with the only possible optimal production volume of the firm:
(16.12)
Guided by this rule, the firm will increase its production until an increase in output by one additional unit will bring an increase in total income that exceeds the increase in total costs. The firm will stop increasing production when the increase in total income is equal to the increase in total costs. Since for absolutely competitive enterprise P = AR = MR, then the presented condition for maximizing profit can also be written as the equality of the marginal costs to the price:
(16.13)
In fact, the first-order profit maximization condition can be fulfilled twice, since the marginal production costs first decrease with an increase in output, and then begin to increase. Therefore, it is possible to achieve equality of marginal costs and marginal income (price) both in the area of decrease of the MC curve, and in the area of its increase. To distinguish between these cases, it is necessary to introduce a second order profit maximization condition (a sufficient condition). Mathematically, this means that it is necessary to take the second derivative of the profit function. In the case when it is positive, the marginal income is compared with the marginal costs in the segment of their decrease, and the firm maximizes negative profits, that is, losses. This means that further expansion of production will ensure a reduction in overall losses. If the second derivative of the profit function is negative, then the maximum positive profit is reached. The volume of output corresponding to this condition is optimal, since the marginal income has become equal to the increasing marginal costs and the further expansion of production will not bring an increase in the total profit.
It is pertinent to emphasize that economists call the maximum profit as the maximum positive difference between gross revenue and gross costs, and the minimum negative difference between the same values. Therefore, the minimum loss can be considered as the maximum profit if it is impossible to obtain a positive profit.
Graphically, the achievement of a set goal can be interpreted in two ways: comparing total income and total costs and comparing marginal income and marginal costs.
The continuity in using the listed approaches is obvious. We will show this graphically, first of all, in the case of maximizing positive profits (Fig. 16.2).
Rice. 16.2. Maximizing positive economic profit by a competitive firm in the short run
Figure 16.2 shows that the optimal volume of production for the firm is the volume q *, since the profit is maximal. Its size corresponds to the area of the quadrangle P Е ABC, since the distance AB reflects the amount of profit per unit of production, and the distance CB characterizes the required number of units of production. With a smaller volume of production, the marginal income exceeds the marginal production costs / and the total income does not exceed the total costs by a maximum value /, which indicates the possibility of obtaining additional profit by increasing the output. When the volume of production exceeds q *, on the contrary, the marginal cost is higher than the marginal income. Consequently, reducing the volume of output to q * makes it possible to compensate for the loss of profit due to overproduction. It is important to note that with an optimal output, the profit per unit of output is not optimal. However, profit per unit of production is not a criterion for maximizing total profit. The volumes q 1 and q 2 are the volumes of the break-even output, i.e. when the economic profit is zero. This means that the firm, producing these volumes of products, is only able to fully cover the total income received its total costs. In this case, the price allows only to reimburse the economic costs of production per unit of output, which indicates the absence of positive economic profit.
It is important to emphasize that for optimal output, the slope of the total income curve is equal to the slope of the total cost curve. Since the slope of the total income curve is nothing more than marginal income, and the slope of the total cost curve is the marginal cost.
The figure presented reflects the presence of two, mutually complementary, approaches to determining the optimal volume of production at which a competitive firm will receive the maximum profit. The first approach is based on the use of the profit maximization rule and involves comparing marginal revenue with marginal costs. The second approach is based on comparing total income and total costs of the firm. The optimal output q * provides the firm with a profit, the size of which corresponds to the area of the REABS quadrangle. The amount of profit obtained with a given volume can also be represented as a segment of maximum length as the difference between total income and total costs, that is, when the total income exceeds the total costs as much as possible.
Thus, the point at which the slopes of these curves coincide with each other meets the criterion of profit maximization.
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The case where the firm minimizes negative profit (loss) is shown in Figure 16.3.
Rice. 16.3. Minimization of negative profit by a competitive firm in the short run
The firm, producing the volume of output q *, incurs economic losses, the size of which corresponds to the area of the PEABC quadrangle. In this case, the loss per unit of output is AB, and the optimal output corresponds to the length of the PEA segment. For a given volume of output, the total costs of the firm exceed its total income by the smallest possible amount. It is advisable for the firm to continue working towards minimizing its losses, since then it incurs losses that are not greater than in the case of closing. If the company completely ceases to operate, then its losses will be completely uncovered fixed costs production.
Figure 16.3 shows that the optimal volume of output for a firm - a perfect competitor is the volume q *, since it incurs minimal losses corresponding to the area of the quadrangle P Е ABC. The volume of production q ~ cannot be considered as optimal, since, despite the observance of the first order profit maximization condition, the second (sufficient) condition is not met. For a given volume of production, the firm is faced with the maximum volume of negative profits, that is, losses. Consequently, further reduction of losses requires an expansion of production to output q *, and the firm will begin to receive ever decreasing (up to q *) negative profit.
If the price prevailing in the market does not cover the minimum value of the average variable costs of production, then the firm should leave the industry in order to avoid bankruptcy due to the inability to cover priority payments (Figure 16.4).
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Rice. 16.4. The situation of a competitive firm leaving the industry in the short term
The firm, producing the volume of output q *, incurs economic losses equal to the area of the PEABC quadrangle. Losses consist of fully uncovered fixed costs of production, the size of which corresponds to the area of the quadrilateral DKBC, and partially uncovered variable costs of production, the size of which corresponds to the area of the quadrilateral PEAKD. The economic losses of the firm in the event of closure are equal to the fixed costs of production. Obviously, it is not economically feasible for a firm to continue operating in the current environment and should leave the industry.
Figure 16.4 shows that, producing the volume q *, the firm will not only be unable to fully cover the fixed costs of production, but also part of the variable costs, which indicates its insolvency for priority payments. The total amount of losses will be the area of the quadrangle P Е ABC (moreover, S КBCD - uncovered completely fixed production costs, and - partially uncovered variable production costs). In this situation, there is only one way out for the company - to leave the industry.
The above allows you to determine the curve of the firm's individual supply in the short run. This curve shows how much output the firm will produce at each possible price. Graphically, this curve is a portion of the marginal cost curve above the average variable cost curve (Figure 16.5).
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Rice. 16.5. An individual proposal of a competitive firm in the short term
A firm's supply curve is the portion of its marginal cost curve above the average variable cost curve. For any possible price less than the minimum AVC value, the supply of this firm will be zero, since it will completely cease production under the given conditions and leave the industry. For any possible price greater than the minimum value AVC, the volume of supply of the firm is determined on the shaded section of the marginal cost curve.
In order to plot the short-term market supply curve, it is necessary to sum up the individual supply of all firms at any possible price.
i - type of goods,
j - manufacturer of the i -th product,
q ij - individual offer of the i -th product j-th manufacturer,
Market supply of the i-th product.
Graphically, the formation of the market supply can be represented as follows (Figure 16.6).
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Rice. 16.6. Market competitive offer in the short term
The market supply curve is the relationship between the price and quantity of products supplied by all firms to the market. It can be obtained by horizontally summing the individual marginal cost curves of all firms on the market and shaping their supply. Consequently, the volume of supply of products on the market at each possible price is the sum of the individual volumes of supply of all firms operating in the market.
The short-run market supply curve shows the aggregate output of all firms in the industry at any possible price. The volume of the market supply is the total supply of all individual firms. According to the graph presented, the supply of an economic good in the market can be obtained by adding the supply curves of individual firms. Suppose there are only two firms in the industry. This simplification of reality will make it possible to better understand the mechanism of the formation of the market supply. The individual supply curve for each of the firms represented corresponds to that part of the marginal cost curve that lies above the average variable cost curve.
If the market price is below P1, then the volume of the market supply will be zero. Since this price does not allow firms on the market to cover even the minimum average variable production costs. With a price in the range from P1 to P2, only firm 2 will offer its products on the market and, therefore, the market supply curve will coincide with the supply segment of firm 2 / segment of its marginal cost curve MC2 /. At the price P2, the market supply will be formed by both firms, the volume of which is equal to the sum of the individual supply volumes of firm 1 and firm 2. It is obvious that the sectoral supply curve has an ascending form. The break in this curve at a price of P2 is explained by the scarcity of firms on the market. The more firms operate in the market, the less noticeable such breaks are.
So, according to the presented schedule, the supply of economic goods on the market will take place if the price is not less than P 1, and, accordingly, the volume is not less than Q 1. The market supply will be presented by the second producer until the price becomes equal to P 2. At a given price, the first manufacturer enters the market, and subsequently the two manufacturers will form a market offer together.
16. 3. Behavior of a firm - a perfect competitor in the long run
In the long run, a perfect competitor firm has great mobility due to the mobility of all its economic resources. Any firm is capable of both entering and exiting the market.
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If the firm had a positive profit in the short-term period of time, working in the industry, then this attracts new firms to enter the industry, as a result of which the market supply increases, and the price in the market falls, therefore the firms lose profits. This "dampens" interest in this industry, the supply on the market decreases due to the outflow of firms from the industry, as a result - the price rises. This means that the firms remaining on the market get the opportunity to earn positive profits. This movement will continue until the price is equal to the minimum average total cost of production. It is this equilibrium price that does not "generate" the interest of new firms to enter the industry, nor does it force existing firms to leave it, since the price allows them to fully cover only the minimum costs per unit of output, while economic profit is zero.
Graphical interpretation of the above is presented in Figure 16.7.
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In the long run, if the price of PE1 remains unchanged, there will be an influx of firms into the industry. As the number of firms in the industry increases, the market supply increases from S1 to S2, and the price falls from PE1 to PE2. Under these conditions, not a single firm will be able to get even a normal profit at any scale of production. Therefore, a massive outflow of firms from this industry will begin, since the main objective their activities are to maximize economic profits and they will begin to suffer losses. Thus, the market supply is reduced to S3, which allows the established firms at the prevailing price of PE3 to receive economic profits in a larger volume. Naturally, this is a powerful incentive for the influx of new firms into the industry. Equilibrium in the long run will be achieved under the condition that all firms receive zero economic profit and when market demand is equal to market supply, that is, at an equal price.
According to the above, long-term economic equilibrium in a competitive market can be represented graphically in Figure 16.8.
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Rice. 16.8. Long-term equilibrium of a competitive firm
An industry firm with zero economic profit has no incentive to leave the industry. At the same time, other firms are not interested in entering the industry. Consequently, a competitive firm in the long run will maximize its profits for such a volume of production at which the long-run marginal cost is zero.
The presented analysis allows us to conclude that in the long run, a perfect competitor in a state of equilibrium chooses the volume of production at which the price is equal to the minimum average production costs, and, consequently, to long-term marginal costs.
In an industry with perfect competition, firms are only able to maintain profit for a certain, short time. Appearing to more entrepreneurial and successful manufacturers and being a powerful catalyst for firms in other industries, it inevitably attracts them to enter a new industry for themselves, which ultimately reduces its size to zero.
Analysis of long-term supply cannot be carried out in the same way as short-term: first, obtaining the individual supply curve of the firm, and then, on its basis, by summing the supply curves of individual firms - obtaining the market supply curve of the industry. The fact is that in the long run there is a constant movement of firms in the market: entering and exiting the market as the market situation changes, and, consequently, the market price. This makes it impossible to simply summarize the supply of individual firms, since it is impossible to say with absolute certainty which firms will retain their presence on the market when market prices change.
To determine the long-term market supply, it is necessary to formulate the conditions for its achievement. We will proceed from the assumption that all firms have the same technological level of production, therefore, they can expand their production not due to technological innovations, but by attracting more economic resources. Simplifying reality, we will also assume that the situation in factor markets / that is, the conditions for their functioning / does not change when production changes in our hypothetical industry.
The shape of the market supply curve in the long run depends on how the change in the volume of production will affect the prices of attracted economic resources, and, consequently, on the costs as a result of changes in sectoral output. In accordance with this, it is customary to distinguish between three types of industries: with constant / unchanged /, increasing and decreasing costs. So far, we have considered the influence on the formation of the market price of changes from the supply side. In the long term, the change in demand for the industry's products can be significant, and therefore it is important to consider the consequences of these changes.,
Let's first consider the industry with constant costs / cm. fig. 16.9 /.
Figure 16.9 Long-term equilibrium in a constant-cost industry
An increase in market demand from D1 to D2 raises the price from P1 to P2. The firm of the industry increases its output from q1 to q2. This leads to a positive profit, since the new equilibrium price P2 exceeds ATC for a new volume of production q2. In this regard, an influx of new firms into the industry begins, as a result of which the market supply increases from S1 to S2. Sectoral production grows, and the equilibrium price decreases to the initial level P1. The long-term market supply curve of the industry corresponds to the straight line SL, which connects the points of long-term market equilibrium E1 and E2.
Suppose the initial equilibrium of the industry in the short run can be represented by the intersection of the demand curve D1 and the supply curve S1, which corresponds to the equilibrium price P1. Point E1 lies on the long-term market supply curve SL and indicates that at a price of P1, the volume of output in the industry will be Q1. Each firm of the industry, being in long-term equilibrium, produces q1 units of output. For a given volume of production, the price P1 corresponds to long-run marginal costs and long-run average costs of production. Observance for the firm is also characteristic of the conditions of short-term equilibrium, equality of price to marginal costs. Let's assume that due to some circumstances the market demand of the short-term period has increased to D2. In the short term, this will push the price up to P2, as the market demand curve D2 will cross the market supply curve S1 at point E2. Each firm in the industry, following the rule of profit maximization, will increase its output from q1 to q2 in accordance with its short-run marginal cost curve. With such a reaction from all the firms represented in the market, they will be able to increase the receipt of positive profits. It goes without saying that such a situation is attractive for expanding their activities by operating firms in this market, and it will also attract outside firms to enter the industry. Thus, the market supply of the industry in the short term will increase from S1 to S2.
The specificity of an industry with constant costs is that the influx of new firms into the industry and an increase in the market volume of output will not affect the changes in the costs of already functioning firms. The fact is that the growth in demand for economic resources attracted to the industry due to the increase in the number of firms in the industry will not change their prices, and, therefore, will not change the costs of operating firms. Therefore, the long run average cost curve of these firms will remain unchanged and new firms will operate at the same LATC curve.
Thus, the influx of new firms into the industry will lead to an increase in output to Q3 and to a decrease in the equilibrium price to P1. In this case, the volume of production increases until the profit earned by firms becomes equal to zero. Zero profit does not encourage new firms to enter the industry and firms involved to leave. The industry reaches a new long-term equilibrium at point E3, where the demand curve D2 crosses the supply curve S2. Note that the volume of output of each firm is reduced to the initial value of q1, and the sectoral production increases to Q3 due to the influx of new firms.
The long-term supply curve in the constant-cost industry is a horizontal line. This means that the equilibrium price remains unchanged regardless of changes in industry output that are affected by changes in market demand. For each volume of output, which is in equilibrium, the equality of price and long-run average production costs is observed.
Now let's look at an industry with increasing costs / cm. fig. 16.10 /.
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Rice. 16.10. Long-term equilibrium in an industry with rising costs
An increase in production in an industry with increasing costs causes an increase in prices for all or some of the resources used in this industry. This causes the average cost of production of the typical firm to rise and its ATC curve upward. Initially, an increase in demand from D1 to D2 leads to an increase in the market price from P1 to P2, which is a powerful incentive for the influx of new firms into the industry due to the emerging positive profits from functioning firms, as well as for the expansion of production of the latter. Gradually, the market supply increases and the price drops to P3. A new equilibrium in the market is achieved at point E3. The long-term supply is represented by an upward sloping SL curve due to increased costs and connects its long-term equilibrium points E1 and E3.
Suppose there is a similar upward shift in market demand from D1 to D2. The consequence of this will be a violation of the long-term market equilibrium represented by the point E1 and an increase in the price to the value of P2, and the volume of production in the short-term period from Q1 to Q2. The operating firm in the industry seeks to increase its output in order to maximize its profits. The opportunity to generate positive economic returns attracts new firms to the industry. However, the specificity of this industry is that the growth in demand for all / or some / economic resources is accompanied by an increase in their prices, and, consequently, leads to an increase in the cost of production. Therefore, an increase in sectoral production as new firms enter the industry and the scale of activity of functioning firms expands means an increase in the cost of their production. The situation in the industry will be characterized by an upward shift of the SATC, LATC, SMC curves for all firms. The adjustment of firms to the changed demand will be expressed in two-way pressure on profits: on the one hand, the emergence of new firms increases the market supply and lowers the price, and, on the other hand, there is an increase in the production costs of each of the firms on the market, therefore the new equilibrium price should be higher than the original. Ultimately, this will lead to a shift in the market supply to position S2 and the establishment of a new equilibrium at point E3 with a higher than the initial equilibrium price P3. The new equilibrium price in the long run is equal to the new average cost of production. The sectoral supply curve in the long run SL passes through the long-term equilibrium points E1 and E3. The long-term supply curve in the industry with increasing costs is upward. This is due to an increase in production costs per unit of output, and therefore the expansion of market production is associated with an increase in prices to stimulate firms to increase output.
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Finally, consider an industry with diminishing costs / cm. fig. 16.11 /.
Rice. 16.11. Long-term equilibrium in an industry with diminishing costs
The growth in demand results in the expansion of production in the industry. The firm's long-run average production cost curve is shifting downward due to falling prices for economic resources. Therefore, a new equilibrium in the industry is achieved at a lower price. The long-term industry supply curve is sloping downward.
A sudden increase in demand from D1 to D2 leads to a violation of the initial equilibrium at point E1 and to an increase in price to P2. The emergence of positive profits for firms stimulates the growth of production in the industry both through the expansion of functioning firms and through the appearance of new firms on the market. An increase in demand for economic resources can lead to a decrease in prices for them, and, therefore, there is a decrease in production costs in the industry that consumes them. This can be represented by the downward shift of the SATC, LATC, SMC curves for each firm. The growth of the market supply is reflected by the curve S2. Thus, a new long-term equilibrium in the industry will be achieved at point E3 at the equilibrium price P3, which is less than the initial one due to a decrease in average production costs. The new equilibrium price is still equal to the average cost of production.
The long-term curve of the market supply in the industry with diminishing costs SL has a descending form due to the cheapening of production and passes through the points of long-term equilibrium E1 and E3.
The presence of industries with constant, increasing and decreasing costs can be explained by the dependence of the costs of an individual firm on its output, as well as on the output of the industry as a whole.
16.4. Market efficiency of perfect competition
The conclusion we made in the previous paragraph about the condition for achieving equilibrium in the long run for an individual firm, regardless of whether the industry is an industry with increasing costs, decreasing or constant costs, can be represented as: P = MR = ATC = MC (16.14)
The presented equality is of great socio-economic importance for the public assessment of the efficiency of the market of perfect competition.
The market of perfect competition is efficient in terms of the distribution and use of limited economic resources of society, and, therefore, it contributes to the fullest possible satisfaction of the needs of society.
Speaking about the efficiency of this type of market, one should highlight not only the efficiency of resource allocation, but also its production efficiency. Efficiency of resource allocation is achieved when resources are distributed among spheres and a branch of the economy so that the created benefits are most needed by society and the formed structure of social production cannot be changed in order to derive net benefits for society. Production efficiency assumes that every economic good is produced at the lowest cost.
The condition for production efficiency is equality: P = ATC min. It means that firms should use the best (less expensive) technology available to them. Otherwise, the threat of bankruptcy hangs over them. This is undoubtedly beneficial to the consumer who benefits from the lowest price of the good.
The efficiency of resource allocation corresponds to the condition: P = MC. Production should be not only technologically efficient. It must also ensure that the economic benefits that are most important to society are obtained. The type of market structure under consideration provides such an allocation of resources in which the created benefits are most in demand by society, that is, there is an urgent need for them on the part of consumers and they fully correspond to the preferences of consumers.
The monetary value of any economic good is the measure that gives an idea of the relative value in the eyes of society of a unit of a given good / its marginal value /. At the same time, the marginal production costs make it possible to assess the benefits that could be obtained using economic resources that actually turned out to be involved in the production of this good. Consequently, the price of a good gives an idea of the degree of satisfaction of the needs of society received from each additional unit of a given good, and the marginal costs of producing an additional unit of a good reflect the loss of society in the form of those goods that could be obtained with the alternative use of resources, but actually involved in production more of this good.
If the volume of the firm's production is less than the volume corresponding to the criterion of efficient allocation of resources, then this indicates an under-allocation of resources for the production of this product from a social point of view and the lack of profit by the firm (relative to the maximum possible). Conversely, when the volume of production exceeds the volume corresponding to the criterion under consideration, it means that society evaluates an additional unit of produced good lower than alternative economic goods that could be produced based on the economic resources involved, which means that there is no efficient allocation of resources and the possibility of their redistribution from the purpose of increasing the net benefits of society and the profit of the company. Only when the price is equal to the marginal cost, the perfect competitor firm is able to maximize its profits, and the resources of society do not require subsequent redistribution.
A competitive pricing system will reallocate resources in response to changes in consumer tastes, technology, and resource reserves in order to maintain efficient resource allocation for a long time.
Despite the limited opportunity for a perfectly competitive market to develop today, the analysis undertaken is valuable because many industries are inherently close to competitive markets: firms in these markets face highly elastic demand curves and are relatively easy to enter and exit businesses. It is also possible that even when there is only one firm on the market, it may behave like a perfect competitor, under a certain set of circumstances.
Now let us turn to the study of the economic nature of the market, in which one economic entity is represented - the producer - to the market of pure monopoly, which is the complete opposite of the market of perfect competition.
In practice, firms may sometimes pursue other goals, such as maximizing total income. However, in relation to a competitive firm, profit maximization is in most cases the only way to survive, to stay in the market.
1. Task ((1)) TOR 1
A perfectly competitive firm means that it is a firm ...
R which does not affect the formation of the market price
other market participants
R can leave the market of perfect competition at any time
2. Task ((1)) T3 1
When analyzing market structures, one usually distinguishes _______________________________________ type (model)
3. Task ((1)) TOR 1
Distribute the types of market structures as the number of firms operating in them increases:
1: monopoly
2: oligopoly
3: monopolistic competition
4: perfect competition
4. Task ((1)) TOR 1
Freedom of entry and exit from the market is characteristic only for ...
R perfect competition
5. Task ((1)) TOR 1
The perfect competition market model is characterized by:
R many small firms
R very easy conditions for entering the industry
R lack of control over the price of the enterprise
Average level
6. Task ((1)) TOR 1
The supply curve of a competitive firm in the short term is:
R is the part of the marginal cost curve above the average variable cost curve
7. Task ((1)) TOR 1
The form of exchange without affecting the price of your goods, but with the possibility of increasing profits by reducing costs and transferring capital to highly profitable industries is called ...
R perfect competition
8. Task ((1)) TOR 1
If in the market everyone can dispose of their income and is responsible for the results of their activities and the "invisible hand" sets the price for buyers and sellers, then this market is ...
R competitive
9. Task ((1)) TOR 1
The market most closely matches the conditions of perfect competition ...
R stocks and bonds
10. Task ((1)) TOR 1
Correspondence between the types of market structures and their characteristics:
23. Market of perfect and imperfect competition. Types of imperfect competition markets.
Quest ((43)) T3 43
The market restriction of the activities of a competitive firm is that:
R the market dictates a certain price level
High level
12. Task ((1)) TOR 1
Economic profit:
R cannot take place in a competitive market in the long run
13. Task ((1)) TOR 1
In the short run, the profit-maximizing firm will cease production if it turns out that ...
R price is less than the minimum average costs
14. Task ((1)) TOR 1
Marginal money product (MRP), marginal product in
physical expression (MP), the unit price of output (P) in
conditions of perfect competition are subject to the following relationship ...
R MRP = МРхР
15. Task ((1)) TOR 1
The conditions of perfect competition include:
16. Task ((1)) TOR 1
The company minimizes losses in conditions of perfect competition if, with an optimal production volume:
R price is above average variable costs, but below average total costs
17. Task ((1)) TOR 1
The features of a completely competitive firm are:
R the firm is in equilibrium when its marginal income is equal to the marginal cost
R curves of average and marginal costs are U-shaped
R is the demand curve for the firm's product - horizontal line
Monopoly
A basic level of
1. Task ((1)) TOR 1
Price discrimination is:
R selling the same product to different customers at different prices
2. Task ((1)) TOR 1
If in the market one seller dictates the price, and the access of other sellers is impossible, then this is ...
R monopoly
3. Task ((1)) TOR 1
Price discrimination applies to the market ...
R monopoly
4. Task ((1)) TOR 1
Monopoly is a market structure in which:
R blocked entry conditions exist
R there is one seller and several buyers in the market
5. Task ((1)) TOR 1
The only sign of a monopoly market is:
R one seller
6. Task ((1)) TOR 1
A monopoly that exists in an industry that exploits unique Natural resources, called ...
R by natural monopoly
Average level
7. Quest ((1)) T31
The negative consequences of market monopolization are:
R manufacturer (monopolist) loses interest in innovations
R prerequisites are created for stagnant phenomena in the economy and the flourishing of bureaucracy
R production efficiency drops
8. Task ((1)) TOR 1
The main goal of the antitrust policy is:
R support for competition
9. Task ((1)) TOR 1
Monopoly offers ____________________________ products on the market.
R only unique
10. Task ((1)) TOR 1
According to the Law of the Russian Federation "On Competition and Restriction monopolistic activity in the commodity markets "a firm occupies a dominant position if its market share ...
R exceeds 35%
11. Task ((1)) TOR 1
The following can serve as a barrier to the entry of new producers into the monopoly industry:
R patents and licenses
R lower costs of large-scale production
R legislative formulation of exclusive rights
12. Task ((1)) TOR 1
In the long run, the monopolist, in contrast to the perfect competitor:
R is protected from competition from other firms
13. Task ((1)) TOR 1
A natural monopoly arises if ...
14. Task ((1)) TOR 1
To get the maximum profit, the monopolist must choose a volume of output such that ...
R marginal revenue is equal to marginal cost
15. Task ((1)) TOR 1
Unlike a competitive firm, a monopoly seeks ...
R produce fewer products and set a higher price
16. Task ((8)) TK 8 "
A market structure characterized by a clear dominance of one
buyer ...
Correct answer: mon * pson # $ #
17. Task ((32)) TK 32
A natural monopoly arises if ...
R the enterprise extracts or owns rare resources
18. Task ((1)) TOR 1
The monopoly is likely to be:
R gas station in the countryside
19. Task ((1)) TOR 1
The function of the total costs of the monopolist TS = 100 + 3Q, where Q is the amount of products produced per month. The demand function for the monopolist's products is P = 200 - Q, where P is the price for the monopolist's products. If the monopolist produces 20 units. products per month, then its total income will be ...
20. Task ((1)) TOR 1
Under monopoly conditions, the following statement is true:
R profit is maximum if marginal costs are equal to marginal revenue
21. Task ((1)) TOR 1
A profit-maximizing monopolist will reduce the price of its product if:
R marginal revenue is higher than marginal cost
22. Task ((46)) TK 46
An increase in the average costs of a monopolist leads to:
R increase in price only if marginal costs also increase
23. Task ((72)) TK 72
A firm with monopoly power in the product market but no monopsony in the factor markets will employ:
R pay higher wages compared to competitive firms
24. Task ((1)) TOR 1
A firm has monopoly power if it ...
R sets the price based on the demand curve
Monopoly competition and oligopoly
A basic level of
1. Task ((1)) TOR 1
The cartel is ...
R form of monopoly, in which its participants, while maintaining commercial and industrial independence, agree among themselves on prices, market division, exchange of patents
2. Task ((1)) TOR 1
In conditions of oligopoly, the enterprise ...
R will agree on its pricing policy with partners
3. Task ((1)) TOR 1
Oligopoly is a market structure where it operates ...
R a small number of competing firms producing homogeneous or differentiated products
4. Task ((1)) TOR 1
Market models of imperfect competition include:
R oligopoly
R monopsony
5. Task ((1)) T3 1
A market structure where a small number of competing firms operate and a differentiated or standardized product is produced is called ...
Correct answer options: * leagues * gender # $ #
6. Task ((1)) TOR 1
Monopolistic competition is not characterized by:
R interdependence of sellers in setting prices
7. Task ((1)) TOR 1
An oligopoly can be attributed to a situation when an industry enters ...
R from 2 to 10 firms
Average level
8. Task ((1)) TK I
To market structures in which firms do not receive
economic profit in the long run, include:
R perfect competition
R monopolistic competition
9. Task ((1)) TOR 1
Perfect and monopolistic competition markets have one thing in common:
R there are many buyers and sellers in the market
10. Task ((1)) TOR 1
If the market price is focused on the leader selling the bulk of goods, and market access is limited by the scale of capital, then this is ...
R oligopoly
11. Task ((1)) TOR 1
The founder of the theory of oligopoly is ...
R A. Cournot
12. Task ((1)) TOR 1
The oligopodietal market is similar to the monopolistic competition market in that:
R firms have market power
13. Task ((1)) TOR 1
In conditions of monopolistic competition, the company produces:
R differentiated product
14. Task ((1)) TOR 1
Non-price competition includes:
R product differentiation
15.Problem ((1)) T31
The basic principles of pricing in an oligopolistic market include:
R conspiracy in the price
R price leadership
R price cape
16. Task ((1)) TOR 1
The form of monopoly, in which its participants, while maintaining commercial and industrial independence, agree among themselves on prices, market division, exchange of patents is called:
Correct answer options: cards * l # $ #
17. Task ((1)) T3 1
An association of entrepreneurs that undertakes the implementation of all commercial activities while maintaining the production and legal independence of the enterprises included in it, it is called:
Correct answer options: С * ndika *
18. Task ((33)) TZZZ
An unspoken agreement on prices, division of markets and other methods of restricting competition is ...
R conspiracy
19. Task ((1)) T3 1
A characteristic manifestation of the uncooperative behavior of an oligopoly is ...
R price war
High level
20. Task ((1)) TOR 1
A cartel member could increase his profit:
R selling your goods at a lower price than other cartel members
R pursuing active non-price competition
21. Task ((1)) TOR 1
If a firm operating in the market does not receive economic profit in the long run, then such a firm operates in the industry:
R perfect competition
R monopolistic competition
22. Quest ((1)) T31
Monopolistic competition arises in the markets for goods, the elasticity of demand for ...
R is usually high
23. Task ((1)) TOR 1
Demand for the products of firms under monopolistic competition ...
R is more elastic than that of a pure monopolist, but less elastic than that of a firm in perfect competition
Conditions and significance of the market of perfect competition, its advantages and disadvantages
Competition (from lat.
Perfect Competition Market Basic Level
concurro - "to run together") - pro
fighting, rivalry between participants in the market
farm for the most favorable production conditions
and the sale of goods and services in order to obtain the maximum
The main conditions for the emergence of competition:
1) complete economic (economic) isolation of each
dogo commodity producer;
2) complete dependence of the commodity producer on the conjuncture
3) opposition to all other commodity producers in the struggle
not for customer demand.
Competition is the most important element of the market that plays a role
an important role in improving the quality of products, works and services,
reduction of production costs, in the development of technical
novelties and discoveries.
In different sectors of the economy, there is a different co-
standing competition. Between the poles of pure competition
and pure monopoly are monopolistic competition
tion and oligopoly
Perfect
Competition Imperfect competition
Rice. 7.1. Types of competition
Perfect (pure) competition includes intra-
sectoral and cross-sectoral competition. Intraindustry
competition (between manufacturers of similar products)
leads to technical progress, lower production costs
management and prices of goods. Inter-industry competition (between
manufacturers of different goods) allows you to find a sphere of more
profitable capital investment.
By the number of manufacturers and buyers on the market,
type of product, the ability to control the price, use
to identify methods of non-price competition, ease of entry
in the industry of new firms, markets of pure competition can be distinguished
rentia, monopoly competition, oligopoly, pure
monopoly. The last three are characterized as non-
perfect competition (Table 7.2).
Perfect (pure) competition is a market system
tation, when numerous, independently acting productions
drivers sell identical (standardized) products
duction, and none of them is able to control
market price.
The main characteristics of a perfect (clean) con-
courses:
1) there are a large number of buyers and sellers in the market,
each has a relatively small share of the data market
2) identical, standardized products, goods of the same
are homogeneous in terms of customer needs and, accordingly,
responsibly, sellers;
3) free access to markets for new sellers and opportunities
the same free exit from them, entry and exit from
branches are absolutely free;
4) availability of complete and accessible information for participants
exchange about prices and their changes, about sellers and buyers-
lyakh; economic actors should have one
volume of information about the market.
Positive Competition Phenomena:
1) cost reduction;
2) rapid implementation of scientific and technical progress;
3) flexible adaptation to demand;
Characteristic features of types of competition
4) high quality products;
5) an obstacle to overpricing.
Negative Competition Phenomena:
1) the ruin of many subjects of the market economy;
2) anarchy and production crisis;
3) overexploitation of resources;
4) environmental violations.
In order to ensure the best marketing opportunities for your
products, sellers use various methods of con-
current struggle:
1) price competition. The manufacturer in order to create on
market for its products more favorable conditions
and undermining the position of a competitor reduces the price by
reducing production costs;
2) non-price competition. Raising the technical level,
product quality, creation of substitute goods, ser-
Perfect competition, monopolistic competition, oligopoly, monopoly: comparative characteristics of market models
It is customary to understand the market structure as a set of many specific signs and features that reflect the peculiarities of the organization and functioning of a particular industry market. The concept of market structure reflects all aspects of the market environment in which a firm operates - the number of firms in the industry, the number of buyers in the market, the characteristics of the industry product, the ratio of price and non-price competition, the bargaining power of an individual buyer or seller, etc. n. Theoretically, there can be a large number of market structures. Nevertheless, many economists consider it possible to simplify the analysis by resorting to a typology of market structures based on several basic parameters - signs of an industry market.
1. The number of firms in the industry. The number of sellers operating in a given sectoral market will determine whether or not an individual firm has the ability to influence market equilibrium. All other things being equal, with a large number of firms in a given market, any attempts by an individual firm to influence market supply by reducing or increasing individual supply will not lead to any significant changes in market equilibrium. In this case, the market share of each particular firm is negligible. A different situation will arise when the market share of a firm is large, that is, one or more large firms operate in a given market. Such a firm has the opportunity to influence the market supply, and hence the market equilibrium and market price.
2. Control over the market price. The degree of control of an individual firm over the price is the most striking indicator of the level of development of competition relations in the industry market. The more control an individual manufacturer has over price, the less competitive the market is.
3. The nature of the products sold on the market - a standardized or differentiated product is produced by the industry. Product differentiability means that in a given market, different firms offer products designed to meet the same need, but differing in different parameters. Here there is such a relationship: the higher the degree of differentiation (heterogeneity) of industry products, the more the firm has the opportunity to influence the price of the goods it produces and the lower the degree of competition in the industry. The more standardized (homogeneous) industry products are, the more competitive the market is.
4. Conditions for entry into the industry, which is associated with the presence or absence of barriers to entry into the industry. The presence of such barriers will hinder the entry of new firms into this industry market and, consequently, the development of industry competition.
5. The presence of non-price competition. Non-price competition takes place if the industry product is differentiable. Non-price competition - competition in the quality of products, services, location and availability, as well as advertising.
Depending on the content of each feature and their combination, different types are formed sectoral markets(different market models) - perfect competition, monopolistic competition, oligopoly and pure monopoly.
Based on the presented characteristics, it is possible to give definitions of various types of market structures:
perfect competition- a market model, which is characterized by price competition between manufacturers of standardized products that are unable to influence the market equilibrium and the market price. A market structure for which at least one of the conditions of perfect competition is not met is a market of imperfect competition. Markets of imperfect competition, in turn, are represented by markets of pure monopoly, monopolistic competition, oligopolistic markets;
pure monopoly- the type of market structure, characterized by the absence of competition, which presupposes the dominance of one firm on the market closed by entry barriers, producing a unique product and controlling the price;
monopolistic competition- the type of market structure, within which sellers of differentiated products compete with each other for sales volumes, and non-price competition acts as the main reserve for achieving competitive advantage in the market;
oligopoly- the type of market structure, within which several interdependent and often interacting firms compete with each other for market share (sales volume).
PERFECT COMPETITION is a type of market structure where the market behavior of buyers and sellers is to adjust to the equilibrium state of market conditions.
V economic theory perfect competition is called this type of market organization, in which all types of rivalry both between sellers and between buyers are excluded.
Perfect competition is a scientific abstraction, an ideal type of market structure, serves as a benchmark for comparison with other types of market structures.
Perfect competition is characterized by the following features:
a) many small sellers and buyers;
b) product homogeneity, i.e. products offered by competing firms are identical and interchangeable;
c) free market entry and exit (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 spreads among market participants instantly and costs them nothing;
e) sellers and buyers cannot influence prices and take them for granted;
f) the mobility of production resources.
MONOPOLISTIC COMPETITION is a type of market structure made up of many small firms producing differentiated products and characterized by “free market entry and exit”.
The concept of "monopoly competition" goes back to the book of the same name by the American economist Edward Chamberlin, published in 1933.
Monopolistic competition, on the one hand, is similar to the position of a monopoly, since individual monopolies have the ability to control the price of their goods, and on the other hand, it is similar to perfect competition, since it is assumed that there are many small firms, as well as free entry and exit from the market, that is, the possibility of the emergence of new firms.
A market with monopolistic competition is characterized by the following features:
a) the presence of many buyers and sellers (the market consists of a large number of independent firms and buyers);
b) free entry to and exit from the market (no barriers to new firms from entering the market, or obstacles to existing firms leaving the market);
c) heterogeneous, differentiated products offered by competing firms. Moreover, the products may differ from one another in one or a number of properties (for example, in chemical composition);
d) perfect awareness of sellers and buyers about market conditions;
e) influence on the price level, but within a rather narrow framework.
OLIGOPOLIA - ϶ᴛᴏ market structure, when very few sellers dominate in the sale of any product, and the appearance of new sellers is difficult or impossible.
The product from different vendors can be both standardized (for example, aluminum) and differentiated (for example, cars).
Oligopolistic markets are dominated, as a rule, by two to ten firms, which account for half or more of total product sales.
The word "oligopoly" was introduced by the English humanist and statesman Thomas More (1478–1535) in the world famous novel Utopia (1516).
Oligopolistic markets have the following characteristics:
a) a small number of firms and a large number of buyers. This means that the volume of the market supply is in the hands of several large firms, which sell the product to many small buyers;
b) differentiated or standardized products. In theory, it is more convenient to consider a homogeneous oligopoly, but if the industry produces differentiated products and there are many substitutes, then ϶ᴛᴏ the set of substitutes can be analyzed as a homogeneous aggregated product;
c) the presence of significant barriers to entry into the market, i.e. high barriers to entry into the market;
d) Firms in the industry are aware of their interdependence, therefore price controls are limited. Only firms with large shares in total sales can influence the price of a product.
MONOPOLY is a type of market structure in which there is only one seller who controls the entire industry of production of a certain product that does not have a close substitute.
A market dominated by monopoly is the exact opposite competitive market where there are many competitors offering standardized products for sale.
Distinguish three type of monopoly.
Closed monopoly. It is protected from competition: legal restrictions, patent protection, copyright institute.
Natural monopoly- an industry in which long-term average costs reach a minimum only when one firm serves the entire market as a whole. Monopolies based on the ownership of unique natural resources are closely related to natural monopolies, which are based on economies of scale.
Open monopoly- monopoly, in which one firm, at least for a certain time, will be the only supplier of the product, but does not have special protection from competition. Firms that first entered the market with new products are often in a similar position.
Such a delineation of monopolies is rather arbitrary, since some firms can simultaneously belong to several types of monopolies.
Pure monopoly- ϶ᴛᴏ a situation when there is only one seller of a product, and there is no close substitute for a product in other industries.
Pure monopolies are rare today. More often there are markets in which several firms compete with each other. Pure monopoly can traditionally exist only under the patronage of the state. Moreover, they are inherent in local markets rather than national ones. Moreover, the concept of pure monopoly would be an abstraction. There are many products for which there are no substitutes.
Pure monopoly is characterized by the following main features:
a) one company and many buyers, that is, there is only one manufacturer on the market that sells the ϲʙᴏth product to many small buyers. If in a given market the only seller is opposed by a single buyer, then such a market is called a bilateral monopoly;
b) lack of substitute products(there are no perfect substitutes for the monopolist's product);
v) lack of ϲʙᴏfree to enter the market(to the industry), i.e.
Perfect competition market model. Income and profit of the company
That is, there are practically insurmountable barriers to entry. The barriers to entry are as follows:
- economies of scale (one of the most common types of barriers to entry);
- legal restrictions: patents, tariffs and quotas in international trade;
- high entry costs are economic barriers. In some industries (such as the aviation industry), starting production can be very expensive;
- advertising and product differentiation. Advertising activities contribute to the formation of confidence and respect among buyers in relation to well-known trade marks... Product differentiation, either on its own or in combination with expanded advertising, can enhance the bargaining power of existing producers and create barriers to entry;
- control by the monopolist of the sources of supply of the necessary raw materials or other specialized resources;
- high transportation costs, contributing to the formation of isolated local markets, as a result of which a technologically unified industry can be represented by many local monopolists;
G) the monopoly firm sets the price for the th product, but does not accept it as a given, as a market reality;
e) perfect awareness.
Perfect Competition Market Model
The main features of the market structure of perfect competition in the very general view have been described above. Let's dwell on these characteristics in more detail.
1. The presence on the market of a significant number of buyers and sellers of this good. This means that not a single seller, not a single buyer in such a market is able to influence the market equilibrium, which indicates that either of them has no market power. Market subjects here are completely subordinate to the market element.
2. Trade is carried out in a standardized product (eg wheat, corn). This means that the product sold in the industry by different firms is so homogeneous that consumers have no reason to prefer the products of one firm to the products of another manufacturer.
3. The inability for one firm to influence the market price, since there are many firms in the industry, and they produce a standardized product. In perfect competition, each individual seller is forced to agree to the price dictated by the market.
4. Lack of non-price competition, which is associated with the homogeneous nature of the products sold.
5. Buyers are well informed about prices; if one of the producers increases the price of their products, they will lose buyers.
6. Sellers are unable to collude over prices due to the large number of firms in the market.
7. Free entry and exit from the industry, that is, there are no entry barriers blocking entry into this market. In the market of perfect competition, there are no difficulties with the creation of a new company, there are no problems if an individual firm decides to leave the industry (since firms are small in size, there will always be an opportunity to sell the business).
Markets for certain types of agricultural products can be cited as examples of perfect competition markets.
For your information. In practice, none of the existing markets is likely to meet all the criteria of perfect competition listed here. Even markets that are very similar to perfect competition can only partially satisfy these requirements. In other words, perfect competition refers to ideal market structures that are extremely rare in reality. Nevertheless, it makes sense to study the theoretical concept of perfect competition for the following reasons. This concept makes it possible to judge the principles of functioning of small firms that exist in an environment close to perfect competition.
The model of perfect competition and the conditions for its occurrence
This concept, based on generalizations and simplification of analysis, allows us to understand the logic of the behavior of firms.
Examples of perfect competition (of course, with some reservations) can be found in Russian practice. Small market traders, ateliers, photo studios, auto repair shops, construction crews, apartment renovators, peasants in food markets, stall retail trade can be regarded as the smallest firms. All of them are united by the approximate similarity of the products offered, the insignificant size of the market, the scale of the business, the large number of competitors, the need to accept the prevailing price, that is, many conditions of perfect competition. In the sphere of small business in Russia, the situation, which is very close to perfect competition, is reproduced quite often.
The main feature of the market of perfect competition is the absence of price control on the part of an individual manufacturer, that is, each firm is forced to focus on the price set as a result of the interaction of market demand and market supply. This means that the volume of production of each firm is so insignificant in comparison with the output of the entire industry that changes in the amount of products sold by an individual firm do not affect the price of the product. In other words, a competitive firm will sell its product at a price already on the market.
Since an individual manufacturer is not in a position to influence the market price, he is forced to sell his products at the price set by the market, that is, at P0.
The firm operates in a market of perfect competition. Dependence of total costs
The firm operates in a market of perfect competition. The dependence of total costs on output is presented in the table:
The market price was set at 40 rubles.
1. How many products should a firm produce to maximize profits? What will be the profit in this case?
2. Starting from what price, the company can work with profit?
3. At what price would it be more profitable for a company to stop producing products? Consider the short term.
Solution:
1. Multiplying the daily output by 40, we get the total revenue. Profit is equal to the difference between total revenue and total costs:
Daily release, thousand pcs. H 0 10 20 30 40 50 60
Total costs, thousand rubles TS 500 620 700 900 1240 1750 2400
Total revenue, thousand rubles TR 0 400 800 1200 1600 2000 2400
Profit, thousand rubles f -500 -220 100 300 360 250 0
From the table we see that the maximum profit, equal to 360 thousand rubles, will be with a daily output of 4 thousand units.
2. The firm is profitable if the price is set above the minimum level of the average total costs.
Market characteristics of perfect competition
To find them, we divide the total output costs.
Daily release, thousand pcs. H 0 10 20 30 40 50 60
Average amounts, costs, rubles ATC - 62 35 30 31 35 40
The minimum value is 30 rubles. If the price is set above 30 rubles, the company operates at a profit.
3. A firm stops producing products if it is unable to cover even variable costs, i.e. if the price is set below the minimum of the average variable costs. To find them, we divide the variable output costs. Variable costs can be found by subtracting constant costs equal to 500 thousand rubles from the total costs. (total costs at zero production volume).
Daily release, thousand pcs. H 0 10 20 30 40 50 60
Variable costs, thousand rubles VC 0 120 200 400 740 1250 1900
Average perm. costs, rub. AVC - 12 10 13.3 18.5 25 31.7
The minimum value of the average variable costs is 10 rubles. If the price is set below 10 rubles., The company stops production.
The main types of the market. The properties of perfect competition and its distinctive features.
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The behavior of each enterprise is influenced by the nature, the type of market in which it operates. The type of market depends on the type of product, the number of enterprises (firms), the presence or absence of restrictions on entering and exiting the industry, the availability of information on prices, innovations, etc. There are the following main types of markets or market structures: pure (perfect) competition, monopoly, monopolistic competition, oligopoly.
Markets by type of competition: 1) Market of free (perfect) competition: all buyers and sellers have equal rights and opportunities.
2) The market of imperfect competition: the market of pure monopoly, monopolistic competition.
Markets by territory: - local, -national, -regional, -world.
Types of markets by volume of purchase and sale:
1) Market for goods and services: Exists in the form of commodity exchanges, wholesalers, fairs and auctions.
2) Markets for factors of production (consumer goods): Purchase and sale of land, minerals, technical resources.
3) Labor market.
4) The market for scientific and technical developments and innovations.
There is also another classification of market types, namely, according to the level of development and independence:
- free market;
- illegal market;
- regulated market.
Competition is a struggle between producers, between suppliers of goods (sellers) for market leadership. Competition presupposes a struggle between producers and suppliers for the most favorable production conditions, areas for capital investment, sources of raw materials, sales markets.
Perfect, free or pure competition- economic model, the idealized state of the market, when individual buyers and sellers cannot influence the price, but form it by their input 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.
Perfect competition features:
-The number of sellers tends to infinity
-All firms produce exactly the same (identical) goods and services.
-Equal availability of location and time costs of all firms.
-All buyers are absolutely informed about the existence of all sellers and ratings for their goods and services
The simplest and initial type of market is the market of perfect competition ("pure competition"), which characteristic features are:
- many buyers and sellers interact in the market;
- the products they offer are homogeneous;
- firms freely enter or leave the market;
- since the share of each competitive firm in the total supply is insignificant, the firm adjusts to the price set by the market and cannot regulate it.
Disadvantages of a perfect competition market:
- in the long term, there is no economic profit as the main source of scientific and technological progress;
- contributes to the unification and standardization of the product, which does not meet the requirements of the modern buyer;
- cannot apply to the production of public goods;
- is supplanted by monopolies and oligopolistic structures.
22. Profit maximization of a competitive firm in the short term (TR-TC comparison principle, MR-MC comparison principle, MR (P) = MC rule).
The main goal of any company is to get the maximum gross profit Tp. It is defined as follows: Tp = TR - TC.
Gross (total) income,
or gross revenue. TR (total revenue), - the total amount of receipts from the sale of a certain amount of goods: TR = Р · Q,
where R -
the price of the product, Q
- volume of sales.
If Tp is negative, the firm incurs a gross loss.
The marginal profit Мp is the additional profit from the sale of each additional unit of production. Marginal profit is equal to the difference between marginal revenue and marginal costs: Мp = MR - MC.
In other words, marginal profit is the change in gross profit associated with the production of each additional unit of output.
The general rule that when this approach allows the company to determine the optimal volume of production: the company will receive the maximum gross economic profit, or the minimum gross loss, with such an optimal, most profitable volume of production, at which the marginal revenue (marginal revenue) and marginal costs are equal: MR = MC.
The rule of equality of marginal revenue (MR) marginal cost (MC.) Marginal income is the income earned from the sale of each subsequent unit of production. MR = TRn-TRn-1. And in conditions of perfect competition, it is equal to the market price.
MR = TRn-TRn-1 = PQn-PQn-1 = P (Qn-Qn-1); but since Qn-Qn-1 = 1, then MR = P.
3 distinctive features of the rule:
1. The rule assumes that the firm would prefer to produce rather than close when MR = MC, but MR> AVC (average variable costs).
2. The rule MR = MC is valid in all markets and for any firms (purely competitive or monopolistic).
3. The rule MC = MR can be formulated in a slightly different form, if we apply it to pure competition, since in conditions of pure competition MR = P, then MC = P, that is, in order to maximize profit, it is necessary to produce such a volume of production at which P = MS (determination of the optimal volume of production).
23. Imperfect competition: monopoly. Conditions for the existence of a monopoly. Barriers to entry into the monopoly market. Maximizing the income and profits of the monopolist. Antitrust Policy .
Monopoly Is a market structure in which one firm is a supplier of goods that have no close substitutes on the market.
A market dominated by monopoly is in sharp contrast to a free market in which competing sellers offer a standardized product for sale. It is difficult or impossible for other firms to enter the monopolized market because there are barriers that prevent competitors from entering the industry.
Pure monopoly is an industry made up of one firm, which is the only manufacturer of a product or service that has no analogues. Buyers do not have a choice, there are no alternatives, and they purchase these products at a price dictated by the monopolist. There is no price or non-price competition.
Bargaining power increases with the weakening of fair competition.
Conditions for the existence of a monopoly
A pure monopoly arises where there is only one seller and there are no real alternatives: there are no close substitute products, and the manufactured product is homogeneous or unique. Monopoly appears in the market when there are entry or exit barriers to entry or exit from an industry.
Monopoly features:
1) there is 1 seller on the market (one firm)
2) there are no similar products on the market
3) monopolist - price dictator
4) the entrance to the monopolistic market is blocked, because there are a number of barriers.
Monopoly barriers:
1) due to production technology
2) the cost of entry (cost of exit) is high, the risk is high.
3) related to patents or licenses
4) power over important raw materials
5) fear of violence and sabotage.
The more goods the monopolist wants to sell, the lower the unit price of the goods should be. By virtue of the law of demand, marginal revenue — the increase in revenue as the volume of sales per unit increases — decreases as sales increase. So that the total revenue of the monopolist does not decrease, the price decrease (that is, the loss of the monopolist for each additional unit of the sold product) must be offset by a large percentage increase in sales. Consequently, it is advisable for the monopolist to conduct its operations in the elastic part of the demand.
As output rises, the monopolist's marginal cost rises (or at least remains unchanged). The firm will expand output as long as the additional proceeds from the sale of the additional unit of goods exceed or at least not less than the additional costs associated with its production, because when the costs of producing the additional unit of output exceed the additional revenue, the monopolist suffers losses.
The monopolist can, while maximizing profits, refuse to increase output, even if the marginal and average costs of production are reduced.
Antitrust Policy is a system of measures aimed at strengthening and protecting competition by limiting the monopoly power of firms.
Among the main directions of the state antimonopoly policy are:
§ direct price regulation;
§ taxation;
§ regulation of natural monopolies.
24. Features of the oligopolistic market. Forms of oligopolistic behavior. Oligopolistic demand curve .
Oligopoly- differs in a small number of sellers, which means that the decision to determine prices and production volumes is interdependent, that is, each firm is influenced by decisions made by competitors and must take them into account in its own behavior in the field of pricing and production volumes.
Entering oligopolistic industries is challenging.
The most important characteristic of the oligopoly market is that the share of sales of each firm is quite significant. This circumstance forces other competing firms to reckon with its actions. In other words, each of the firms in such a market takes into account the possible reactions of other firms to their actions when formulating economic policies. This interdependence of the behavior of firms in the oligopolistic market is called strategic behavior. The latter extends to all areas of market competition:
- pricing policy of firms;
- the volume of their sales;
- product differentiation;
- investment policy;
- product promotion strategy;
- innovation policy, etc.
Oligopoly occupies a middle position between perfect competition and absolute monopoly, which means that it has some features of both models. From perfect competition, it "got" the presence of competitors, and from monopoly - the power over the price. Therefore, it can be concluded that a firm, when changing the price of its product or volume of production, must take into account the response of other oligopolists. Thus, we get two more important characteristics oligopolies - the interdependence of oligopolists and strategic interaction. In addition, another distinctive feature is the differentiation (heterogeneity) of the output (which is not found either in perfect competition or in a monopoly).
(An oligopolistic market can be represented by both a standardized (pure oligopoly) and a differentiated (differentiated oligopoly) product. Regardless of this, oligopolistic markets are always characterized by the presence of significant market power in firms and a decreasing demand curve for the products of each individual firm. However, their feature is in the fact that in conditions of oligopolistic interaction (reaction to each other's actions), firms face not only the reaction of consumers, but also the reaction of their competitors. sloping demand curve, but also by the actions of competitors.)
Characteristic features of an oligopoly:
1. Few firms in the industry. Usually their number does not exceed ten (steel and automotive industries, production of building materials).
2. High barriers to entry into the industry. They are associated with economies of scale.
Market models of perfect (pure) and imperfect competition
In addition to economies of scale, oligopolistic concentration is generated by the patent monopoly (Xerox, Kodak, IBM), the monopoly of control over rare sources of raw materials, and high advertising costs.
3. Universal interdependence. Each of the firms in the formation of its economic policy is forced to take into account the reaction from competitors.
There are two possible basic forms of behavior of firms in conditions of oligopolistic structures: non-cooperative and cooperative. When uncooperative behavior each seller independently solves the problem of determining the price and volume of production.
Cooperative behavior means that firms agree on output and prices.
The demand curve is determined based on market research. It reflects the average output of goods at a given price, taking into account the expected variations in demand. In turn, the “normal” demand curve is used to calculate the “normal” price of a product.
"Broken" (or "bending") demand curve- the theory of oligopoly, which characterizes the behavior of firms in the market if they do not enter into agreements when setting prices. The model is based on the assumption about the possible reaction of firms to price changes by competitors. An oligopo list will have a “broken” demand curve if its competitors support any price cut they make, but do not support its increase.
Answer from Lana lana [guru]
Monopoly in the economy.
Plan.
1. Introduction.
2. The concept of natural monopoly.
3. The state and natural monopolies.
4. Methods of regulation of natural monopolies.
Introduction.
Before proceeding directly to the analysis of natural monopoly, it is necessary to imagine a market model of imperfect competition, within which there is a monopoly, one of the types of which is natural monopoly. Basically, the best way characteristics of the market model of imperfect competition is to compare the latter with the market model of perfect competition and identify the differences between them. Therefore, in my opinion, it is necessary first to say a few words about the market of perfect competition, which, in principle, is an ideal model, since in reality it does not exist. So, the market model of perfect competition is characterized by the following features:
1.the presence in the market of many independent sellers and buyers, each of which produces or buys only a small fraction of the total market volume of a given product;
2. homogeneity of goods and the same perception of buyers and sellers;
3. the absence of entry barriers for new manufacturers to enter the industry and the possibility of free exit from the industry;
4. full awareness of all market participants;
5. rational behavior of all market participants.
Now, based on the differences in the above points, we will try to outline the market model of imperfect competition.
Speaking about the market of imperfect competition, one can go deeper into the analysis, for example, of oligopoly or monopolistic competition, which are real subjects of the market of imperfect competition, however, touching, let alone analysis, of these subjects is not our task, therefore, we will confine ourselves to considering the features of pure monopoly. So what is monopoly? In principle, a monopoly can be characterized as market structure, in which one firm is a supplier to the market of a product that does not have close substitutes. It follows from this characteristic that the product of the monopoly is unique in the sense that there are no good or close substitutes for this product. From the buyer's point of view, this means that there are no viable alternatives, with the result that the buyer must acquire or dispense with the product from the monopolist. In contrast to the subject of the market of perfect competition, which "agrees with the price," the monopolist dictates the price, that is, exercises significant control over the price. And the reason is obvious: he releases and therefore controls the total supply. In a downward curve, the demand for its product, the monopolist can cause a change in the price of the product by manipulating the amount of the product offered.
One of the most important distinguishing features of a monopoly is the presence of barriers to entry into the industry, that is, constraints that prevent the emergence of additional sellers in the market of the monopoly firm. Market entry barriers are necessary to maintain monopoly power. If free entry into monopolized markets were possible, the economic profits generated by monopoly firms would attract new producers and sellers. Monopoly price control would finally disappear as markets became competitive. The main types of barriers to market entry that enable and maintain a monopoly include the following:
1. Exclusive rights received from the government. For instance, local authorities authorities often permit a single firm to install cable TV systems. The authorities usually grant a monopoly on the right to provide transport services, communication services, as well as basic utilities such as public hygiene, electricity, water supply and sewerage, gas supply. In France, since 1904, the funeral business has been controlled by General Funerals, mono
