Model of perfect competition and its characteristics. Perfect competition market model

Real markets, as a rule, are in the zone of imperfect competition and can be classified as either oligopoly or monopolistic competition. Despite this circumstance, the study of market structures in economic theory begins with an analysis of the ideal perfect competition model. Firstly, the model allows us to study real markets, the operating conditions of which are close to competitive ones. Secondly, using the example of a competitive market, the main question facing any company is resolved: what volume of products should be produced to maximize its profits, i.e. what are the conditions of economic equilibrium of the company. IN - third, the model of perfect competition allows us to assess the degree of monopolization and the efficiency of functioning of real markets .

Consider a small farm that is deciding how much space to devote to planting a crop next year. Obviously, the farmer proceeds from the prices that prevailed on the market this year. And his decisions to increase or decrease his production will not have any impact on the market price of the product. A perfect competitor is in the market price taker and his individual demand curve is perfectly price elastic (Figure 7.2). The market demand curve decreases (Figure 7.1). Demand curve , that an individual firm deals with is a horizontal line, since a competitive firm can sell any additional quantity of the crop without reducing the price.

Figure 7.1. Product demand curve Figure 7.2. Demand curve for

competitive industry products of a competitive firm

Since the decisions of an individual firm do not affect the market price (P e = const), total income curve (TR) of the firm will increase in direct proportion to the volume of production. Total revenue (total revenue, TR ) - this is the total amount of income received by the company from the sale of all its products: TR = P x Q. Average revenue (average revenue, AR = TR/Q). Average income competitive firm is determined by the market price for any volume of output: AR = P . Marginal revenue (MR) - additional income from the sale of one additional unit of output: MR = Δ(TR)/ ΔQ or MR = TR"(Q). Marginal revenue of competitive a firm is determined by the market price for any volume of output: МR = Р.

Question 4. Short-term and long-term equilibrium of a competitive market

In conditions where the current price is set by the market, the only way to increase profits is to reduce production costs and regulate output. Based on the currently existing market and technological conditions, the company determines the optimal output volume, i.e. one that provides the company with the maximum possible profit.

Regardless of which market - competitive or non-competitive - a company operates, its profit will be greatest if the volume of output is the largest difference between total revenues TR and total costs TC , as is the case with output volume Q* in Figure 7.3.

The total profit function is calculated as the difference between the total income (revenue) function and the total cost function: TP = TR – TC. The derivative of the total profit function is called marginal profit: P"(Q) = TR"(Q) - TC"(Q) or P"(Q) = MR – MS, where MR - marginal income; MS - marginal costs. At the optimum point, the derivative of the total profit function is equal to zero: P"(Q)=MR – MC=0. Therefore, the optimum condition for the firm is: MC = MR.

This equality applies to any market structure, but in conditions of perfect competition it is slightly modified. Since the market price is identical to the average and marginal revenue of a competitive firm P = AR = MR , then the equality of marginal costs and marginal revenues is transformed into the equality of marginal costs and prices: MC = R. Remember the economic meaning of the Lerner coefficient.

To estimate the short-run supply function a competitive company should proceed from the optimal condition (P = MC), and from the condition of the feasibility of continuing production (P > min AVC). A competitive firm's supply curve will coincide with its marginal cost curve MC above the minimum level of average variable costs AVC . At lower than min AVC , level of market prices, the supply curve will coincide with the ordinate axis.

In the long run, all factors of production are variable and the condition for the feasibility of continuing production becomes: P > min AC. Since we are considering a competitive industry, we assume that there are no restrictions on entry or exit from it.

If the level of costs prevailing in the industry allows individual producers to receive a positive short-term economic profit, then firms operating in the market strive to expand their production to the optimum point. At the same time, the investment attractiveness of the industry is increasing, and an increasing number of external firms are beginning to develop this market. The emergence of new firms in the industry and the expansion of the activities of existing firms inevitably increases market supply, reduces the market price level and, as a consequence, leads to a decrease in economic profit to zero. Consider what happens if economic profit is negative separately for the short run and the long run. Conclusion: in conditions of perfect competition, economic profit tends to zero.

The absence of economic profit does not deny the existence of normal profit as the price for entrepreneurial ability. Consider that there is a normal profit and a normal rate of interest on capital, and why attempts to deny the exploitation of labor under conditions of perfect competition are untenable.

Questions about lecture 7. Analysis of market structures. Perfect competition model

Two meanings of the term competition

Translate the term "poleo"

Translate the term "oligos"

Translate the term "psoneo"

Definition of market structure, its types

Criteria for classifying market structure

Characteristics of perfect competition

Characteristics of Monopolistic Competition

Characteristics of Oligopoly

Characteristics of a monopoly

Production concentration indicators

Degrees of concentration of production in Western practice

Degrees of concentration of production in Russian practice

What indicator expresses the degree of market power of a company?

What is a perfect competitor in terms of price?

What is the average revenue and marginal revenue of a competitive firm?

Derive the optimal condition of the company from the point of view of costs and sales

What does the optimum look like for a firm that is a perfect competitor?

What does the individual supply curve of a competitive firm look like in the short run?

The individual supply curve of a competitive firm in the long run

What is the economic profit of a firm under perfect competition?

Does zero economic profit mean no exploitation of labor?

Bibliographic description:

Nesterov A.K. The model of perfect competition and the conditions for its emergence [Electronic resource] // Educational encyclopedia website

Let us consider the conditions for the emergence and formation of the perfect competition market model.

Perfect competition, by its definition, presupposes the initial existence of a product homogeneous in properties and characteristics, its consumers and producers, the number of which tends to an infinitely large number, while an individual consumer and producer has a small market share, insignificant influence and cannot determine the essential conditions of sale or consumption of goods by other market participants.

In the model of perfect competition, an important aspect is also the availability of objective, necessary and publicly available information about goods, prices, price dynamics, as well as information about sellers and buyers, not only in a specific place, but also in the whole market and its immediate environment.

In the model of perfect competition there is an absence of any power of producers of goods over the market, prices for these goods and buyers, however, the price is set not by the manufacturer, but through the mechanism of supply and demand. It should be noted that the model of perfect competition can only exist ideally, since its characteristic features are not found in real economic systems in their pure form. Despite the fact that the real embodiment of perfectly competitive markets in modern economic systems does not exist in full compliance with the model of perfect competition, some markets are very close in their parameters to perfect competition. The markets closest to the conditions of perfect competition are agricultural markets, the foreign currency market and the stock exchange.

In general, it corresponds to a set of elements that consists of many consumers of a product and many producers of a product, while the state acts as a subject that does not directly influence market mechanisms. Consequently, the market size is determined by the sum of the number of consumers and the number of producers, provided that these sets do not intersect.

We can draw an objective conclusion that, according to the definition of perfect competition, the operating conditions of the market imply that the number of consumers tends to infinity, as well as the number of producers. Consequently, the size of the market, determined by the sum of the number of consumers and the number of producers, also tends to infinity. However, in real conditions this is not possible due to market limitations. Thus, perfect competition on this basis is possible only under ideal conditions.

The definition of perfect competition indicates that the entire set of producers on the market produces homogeneous products, and all products in the product range have the same quantitative characteristics. At the same time perfect competition model objectively indicates the fact that at least one product must be presented on the market. At the same time, the model of perfect competition assumes that for a set of sets of consumers and producers, a set of standardized consumed and produced goods with certain price characteristics is given. However, the equivalence of goods in practice is not really possible, since completely identical goods do not exist, and many characteristics of goods cannot be expressed by quantitative characteristics in the form of numerical data, especially given the existence of non-price indicators. Thus, this feature is also an ideal condition for the existence of perfect competition.

According to the definition of perfect competition, an individual consumer and producer cannot influence the conditions for the sale or consumption of goods that are significant for other participants in this market. In this regard, the model of perfect competition takes into account that in conditions where there is equal awareness of all market participants, each of them will strive to maximize their own benefit from the sale or consumption of goods. Taking this into account, the market, determined by the sum of the number of consumers and the number of producers, the number of which tends to infinity, in the short term has no upper limit on benefits under conditions of perfect competition. Therefore, in the short run, the manufacturer will strive to maximize its profits by changing the volume of goods produced, while operating with the variable factors available to it, such as labor and materials. At the same time, under conditions of perfect competition, marginal revenue is equal to the price of a unit of production, so the manufacturer will increase the volume of goods produced until marginal costs become equal to marginal revenue, i.e. price. In real conditions, the benefit from the sale or consumption of goods cannot tend to infinity; therefore, this feature also characterizes the model of perfect competition as a certain set of ideal conditions. Accordingly, a decrease in the rate of profit in the long term is natural, therefore such a model of competitive relations is doomed to failure and some external intervention in the market situation is required.

Conditions for the emergence of perfect competition

Analyzing the model of perfect competition, we can make an objective conclusion that the conditions for the emergence of perfect competition come down to 4 main factors.

Conditions for the emergence of perfect competition

First, all producers require free access to factors of production at equal prices. In this case, full coverage of all resources, both tangible and intangible, including technology and information, is required. This condition for the emergence of perfect competition means the absence of geographical, organizational, transport and economic barriers to entry and exit from the market in relation to any manufacturer of goods sold on this market. It also guarantees the absence of collusion between producers regarding pricing policies and volumes of production of goods and ensures the rational behavior of all participants in the perfect competition market.

Secondly, a positive effect of production scale is achieved only when producing such a quantity of goods that does not exceed the demand available on the market from consumers of these goods. This condition for the emergence of perfect competition predetermines the economic feasibility and rationality of functioning within a given market of many small producers, the number of which, according to the model of perfect competition, tends to infinity.

Thirdly, prices for goods should not depend on the volume of their production and the pricing policy of an individual manufacturer, as well as the actions of individual consumers of these goods. This condition de jure assumes that producers operating in the market accept the price as a fact established from the outside; de facto, it means that the mechanism of supply and demand operates only on the basis of market laws, due to which the price is determined by the market, which corresponds to the price market equilibrium. In addition, this means that initially the costs of all consumers for the production of homogeneous goods are practically the same due to the similarity of the production technology used, the prices of production factors and the lack of differences in transport costs.

Fourthly, there must be complete information transparency of data on the characteristics of goods and their prices for consumers, as well as information about production technology and prices for production factors for producers. This condition for the emergence of perfect competition involves the provision of symmetrically developing sets of buyers and consumers, the number of which should tend to infinity. This condition is also associated with the ability of any market participant at any time to enter into a transaction with any other market participant without additional costs compared to any other producer or consumer.

When these conditions are met, a market of perfect competition arises, in which buyers and producers perceive market prices as set from the outside and do not influence them, without having a direct or indirect opportunity to do so. The first and second conditions ensure the presence of competition, both among buyers and among producers. The third condition determines the very possibility of a single price for a homogeneous product within a given market. The fourth condition is necessary for optimal interaction between market participants when buying and selling similar goods.

You can also select 3 additional ones.

Conditions for the emergence of perfect competition

Additional conditions for the emergence of perfect competition	Characteristic
Consumer capital	In particular, the condition must be met that the consumer’s capital, with which he purchases goods, consists of the sum of his initial savings and the results of participation in the distribution of income in the production sector. The latter can be expressed in the form of receiving wages as payment for hired labor or dividends on share capital.
No personal preferences	In addition, the condition that producers and consumers do not have preferences of a personal, spatial and temporal nature must be met. This makes it possible to ensure the existence of a collection of large sets of producers and consumers, the number of which tends to infinity.
No possibility of intermediaries	Also, as an additional condition for the emergence of perfect competition, there is the initial absence of the possibility of exchange offices, dealers, distributors, investment funds and any other intermediaries between producers and consumers appearing on the market. This follows from the market model of perfect competition, which includes only a set of sets of producers and consumers.

Theoretical nature of the perfect competition model

From the point of view of economic theory, the conditions of perfect competition are characterized as the most beneficial for society in the medium term, since unprofitable markets in the long term cease to exist and are replaced by new ones that bring benefits to participants in these markets, which indicates the successful development of society as a whole. However, not everything is so simple.

The conditions necessary for the emergence of a perfectly competitive market are largely idealized, as confirmed by the model of a perfectly competitive market.

On the one hand, in practice it is impossible to fulfill all these conditions in the required form, on the other hand, it seems futile to maintain such conditions in the long term. Largely for this reason, the model of perfect competition is abstract. The perfect competition market model, which assumes complete freedom of competition and the market mechanism, describes the situation of the functioning of an ideal market and has more theoretical than practical significance. At the same time, consideration of the conditions for the emergence of perfect competition is a very significant area of building mathematical models, since it allows us to abstract from unimportant aspects when studying the principles of economic interaction and behavior of producers and consumers.

Thus, the interaction of producers and consumers in conditions of perfect competition should be considered exclusively from the point of view of studying the theoretical basis of the functioning of the market mechanism.

The value of the perfect competition model lies in its ability to analyze:

firstly, from the position of each market participant when determining the strategy of behavior when selling or consuming a product,
secondly, from the position of assessing a particular type of product on the market,
thirdly, from the perspective of the general state of competition in the market as a whole.

In the first case, the state of a particular subject and its interactions with other market participants is considered without taking into account the goods produced or consumed by it. The second approach allows us to evaluate the overall characteristics of a product without taking into account which specific market participant produced or consumed it. The most thorough is the third case, which is based on the search for the optimal state of the market as a whole, which would suit both producers and consumers.

Literature

Berezhnaya E.V., Berezhnaya V.I. Mathematical methods for modeling economic systems. – M.: Finance and Statistics, 2008.
Volgina O.A., Golodnaya N.Yu., Odiyako N.N., Shuman G.I. Mathematical modeling of economic processes and systems. – M.: KnoRus, 2012.
Panyukov A.V. Mathematical modeling of economic processes. – M.: Librocom, 2010.

In economic theory, perfect competition is a form of market organization in which all types of rivalry between both sellers and buyers are excluded. Thus, the theoretical concept of perfect competition is actually a negation of the understanding of competition as intense rivalry that is common in business practice and everyday life. Perfect competition is perfect in the sense that with such a market organization, each enterprise will be able to sell as many products as it wants at a given market price, and neither an individual seller nor an individual buyer will be able to influence the level of the market price.

The model of perfect competition is based on a number of assumptions about the organization of the market.

1. Product uniformity. Product homogeneity means that all units are exactly the same in the minds of buyers and they have no way to recognize who exactly produced a particular unit. This means that the products of different enterprises are completely interchangeable and their indifference curve is straight for each buyer.

The totality of all enterprises producing a homogeneous product forms an industry.

Homogeneous products are standardized goods, usually sold on specialized commodity exchanges.

Products are not homogeneous, although they are the same, the manufacturers (or suppliers) of which can be easily recognized by buyers by production or trade mark (aspirin, acetylsalicylic acid), brand name or other characteristic features, if buyers attach significant importance to them, of course. Thus, the anonymity of sellers, together with the anonymity of buyers, makes a perfectly competitive market completely impersonal.

Perfect interchangeability of homogeneous products from different enterprises means that the cross price elasticity of demand for them for any pair of manufacturing enterprises is close to infinity:

where i, j are enterprises producing homogeneous products. This means that a small increase in price by one enterprise above its market level leads to a complete switching of demand for this product to other enterprises.

2. Smallness and multiplicity. The smallness of market entities means that the volumes of supply and demand of even the largest buyers and sellers are negligible relative to the size of the market. Here, “negligibly small” means that changes in the volumes of demand and supply of individual entities within a short period (i.e., with constant enterprise capacity and constant tastes and preferences of buyers) do not affect the market price of the product. The latter is determined only by the totality of all sellers and buyers, that is, it is the collective result of market relations.

It is clear that the smallness of market entities also presupposes their multiplicity, that is, the presence of a large number of small sellers and buyers in the market.

Let, for example, assume that 10,000 enterprises are engaged in the production of certain homogeneous products, each of which accounts for 0.01% of industry production. Let us assume that the price elasticity of market demand is e = -0.5. Then, if one of the enterprises decides to double its output, the output of the entire industry will increase by 0.01%. Using the formula for calculating direct elasticity of demand (4.3), we obtain

whence Δр/р = -0.02. Thus, doubling output by one of the enterprises in the industry will lead to a decrease in the market price by two hundredths of a percent.

The smallness and multiplicity of market entities imply the absence of formal or informal agreements (collusion) between them in order to gain monopoly advantages in the market.

Assumptions about the homogeneity of products, the multiplicity of enterprises, their smallness and independence are the basis for the next important assumption. Under conditions of perfect competition, each individual seller is a price taker: the demand curve for his product is infinitely elastic and looks like a straight line parallel to the output axis; the enterprise can sell any volume of products at the existing market price.

Since in this case the total revenue of the enterprise, TR, grows (falls) in proportion to the increase (decrease) in output, the average and marginal revenue from its sales are equal and give with the price (P = AR = MR).

Therefore, the demand curve for the products of an individual enterprise under conditions of perfect competition is simultaneously the curve of average and marginal revenue.

3. Freedom of entry and exit. All sellers and buyers have complete freedom to enter the industry (market) and exit it (leave the market). This means that enterprises are free to start production of a given product, continue or stop it if they deem it appropriate. In the same way, buyers are free to buy goods in any quantity, increase, reduce or even stop purchasing them. There are no legal or financial barriers to entry into the industry. There are no, for example, patents or licenses that provide preferential rights to manufacture certain products.

Entry into the industry (and exit from it) does not require any significant initial (and therefore liquidation) costs. On the other hand, no one is obligated to stay in the industry unless it suits their wishes. There is no government intervention in the organization of the market (subsidies and tax breaks, quotas and other forms of regulation of supply and demand).

Freedom of entry and exit also presupposes perfect mobility of buyers and sellers within the market, the absence of any forms of attachment of buyers to sellers.

4. Perfect awareness (perfect knowledge). Market subjects (buyers, sellers, owners of production factors) have perfect knowledge of all market parameters. Information spreads among them instantly and costs them nothing. This assumption is the basis of the so-called law of one price, according to which in a perfectly competitive market every product is sold at a single market price. This is perhaps the least realistic and most heroic assumption in economic theory. Let's look at it in more detail.

Unfortunately, such a priori knowledge does not exist. Information is scarce; obtaining, processing and using it costs time, effort and money. Therefore, some economists prefer the model of perfect competition to the pure competition model, recognizing that obtaining and using information requires some time and effort.

In market theory, the concepts of periods are somewhat clarified.

We can give them the following definitions.

Instant A period is such a short period that the output of each enterprise and the number of enterprises in the industry are fixed.

Short A period is a period during which the production capacity of each enterprise (the size and number of plants, factories, and other production units) is fixed, but output can be increased or decreased by changing the volume of use of variable factors. The total number of enterprises in the industry remains unchanged.

Long lasting period is the period during which production capacity can be adjusted to demand and cost conditions. In extreme cases (if operating conditions are completely unfavorable), the enterprise may completely cease operations (leave the industry or market). On the other hand, new enterprises can enter the industry (market) if market conditions are favorable. Thus, the number of enterprises in a homogeneous industry may vary over a long period.

As a result, to the already known characteristics of instantaneous, short and long periods, another one is added - the possibility (impossibility) of new enterprises entering the market (industry) and exit of previously operating enterprises. In the short period, the number of enterprises in the industry and their capacity are constant; in the long term, not only the volume of resources used and costs, but also the number of enterprises and their capacity are variable.

Due to the assumption of product homogeneity, the cost functions of all enterprises in the industry must be the same - product homogeneity also presupposes the homogeneity of the resources expended. Therefore, we can talk about the behavior of a typical enterprise, all conclusions about which will be valid for every enterprise in the industry. For the sake of simplicity, we assume that each enterprise has no inventories of finished goods (equal to zero), so that the sales volume of each enterprise is equal to the volume of its output in the same period.

In conditions of perfect competition, the enterprise is a price taker. It can maximize its profit only by adapting the volume of output to the conditions of the commodity market, on the one hand, and/or to its own costs determined by technology, on the other. But it cannot influence the price of the product. Let us determine the output that ensures maximum profit for a perfectly competitive enterprise under given market and technology conditions. Let us note only in advance that economists call the maximum profit both the maximum positive difference between revenue and production 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.

The comparison of marginal revenue with marginal costs can also be done directly.

Production should continue until the marginal cost curve intersects the price level (MC = P). Since in perfect competition the price is determined independently of the firm and is perceived as given, the firm can increase production until marginal cost equals its price. If MS< Р, то производство можно увеличивать, если МС >P, then such production is carried out at a loss and should be stopped. In Fig. 6-16 total income (TR = PQ) is equal to the area of the rectangle 0MKN. The total costs TC are equal to the area 0RSN, the maximum total profit (Pr = TR - TC) represents the area of the rectangle MRSK.

In conditions of short-term equilibrium, four types of firms can be distinguished (see Figure 6-17).

The firm that manages to cover only average variable costs (AVC = P) is called the marginal firm. Such a company manages to stay afloat only for a short time (short-term period). If prices increase, it will be able to cover not only current (average variable costs), but also all costs (average total costs), i.e., receive normal profit (like an ordinary pre-margin firm, where ATC = P).

In the event of a price reduction, it ceases to be competitive, since it cannot even cover current costs and will be forced to leave the industry, finding itself outside of it (exorbitant firm, where AVC > P). If the price is greater than average total cost (ATC< Р), то фирма наряду с нормальной прибылью получает сверхприбыль.

Offering a perfectly competitive market in a short period

The price supply function is the dependence of the quantity supplied on the price of a given product. It can be shown that the supply curve of a perfectly competitive enterprise in the short run is identical to part of its marginal cost curve.

In Fig. Figure 9.4 shows the marginal (SMC), average total (SATC) and average variable (SAVC) cost curves.

At price P1, the maximum positive profit is achieved at output g1; This means that point A on the SMC curve belongs to the supply curve of this profit-maximizing enterprise. At a lower price, P2, profit will be maximum when output q2 means, and point B on the SMC curve belongs to the supply curve. Note that in this case the maximum (positive) profit is zero, since price P2 is equal to the minimum of average total cost (P2 = AR = MR = minSATC).

If the price drops to P3< SATC, прибылемаксимизирующий объем производства упадет до q3. Прибыль в этом случае будет отрицательна, поскольку точка С на кривой SMC лежит ниже кривой SATC и, значит, выручка от продажи выпуска q3 не возместит общих затрат его производства:

But, on the other hand, P3 > SAVC. This means that the proceeds from the sale of issue q3 will reimburse all variables and, in addition, part of the enterprise’s fixed costs. Thus, the loss from output q3 will be less than the sum of total fixed costs (TFC) in the short run. Therefore, compared to zero output, output q3 will be profit-maximizing. Consequently, point C also belongs to the enterprise supply curve.

At an even lower price P4 = minSAVC, output q4 satisfies both profit maximization conditions. This means that the company's losses are equal to the amount of fixed costs. Under these conditions, the enterprise is indifferent whether to produce q4 units of output or close down. Therefore, point D on the SMC curve is often called the closing point. This point may or may not belong to the enterprise supply curve.

Finally, at price P5 = minSMC, output q5 also satisfies the maximization conditions, but the price does not compensate for average variable costs, and for any output other than zero, losses will be higher than fixed costs. Therefore, in this case, zero output will be optimal. In other words, when R< minSAVC прибылемаксимизирующее предприятие предпочтет закрыться. Поэтому точка Е на кривой SMC определенно не принадлежит кривой предложения совершенно конкурентного предприятия.

The supply curve of a perfectly competitive enterprise is shown in Fig. 9.4, b. Here points A", B", C, D" correspond to points A, B, C, D of the SMC curve in Fig. 9.4, a.

A set of similar points forms the section of the supply curve lying above point D", corresponding to the minimum SAVC in Fig. 9.4, a. Note that the section of the SMC curve lying below SAVC is not included in the supply curve, since profit-maximizing behavior dictates the closure of the enterprise if the price products will be below average variable costs.

Thus, the supply curve of a perfectly competitive enterprise in the short run represents the increasing branch of the marginal cost curve, which lies above the minimum of average variable costs.

At a market price level lower than minSAVC, the supply curve merges with the price axis (section OP^ in Fig. 9.4, b).

Perfect competition forces firms to produce products at the minimum average cost and sell them at a price corresponding to these costs. Graphically, this means that the average cost curve is just tangent to the demand curve. If the cost of producing a unit of output were higher than the price (AC > P), then any product would be economically unprofitable and firms would be forced to leave this industry. If average costs were below the demand curve and, accordingly, the price (AC< Р), это означало бы, что кривая средних издержек пересекала кривую спроса и образовался некий объем производства, приносящий сверхприбыль. Приток новых фирм рано или поздно свел бы эту прибыль на нет. Таким образом, кривые только касаются друг друга, что и создает ситуацию длительного равновесия: ни прибыли, ни убытков.

In the long run, all factors become variable, and the industry can change the number of its firms. Since the firm can change all its parameters, it seeks to expand production, reducing average costs. In the case of increasing productivity, average total costs decrease (see the transition from ATC1 to ATC2 in Fig. 6-18) while decreasing productivity - they increase (transition from ATC3 to ATC4).

By connecting the minimum points ATC1, ATC2, ATC3,..., ATCn, we obtain the average total costs in the long run ATCL. If there are positive economies of scale, then the long-run average cost curve has a significant negative slope; if there are constant returns to scale, then they are horizontal; finally, in the case of an increase in costs from an increase in the scale of production, the curve rushes up (see Fig. 6-19 a).

Perfect competition, like the market economy in general, has a number of disadvantages. Speaking about the fact that perfect competition ensures the efficient distribution of resources and maximum satisfaction of customer needs, we should not forget that it comes from solvent needs, from the distribution of monetary income that developed earlier. This creates equality of opportunity, but does not guarantee equality of results.

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

Perfect competition, which involves a huge number of firms, is not always able to provide the concentration of resources necessary to accelerate scientific and technological progress. This primarily concerns fundamental research (which, as a rule, is unprofitable), knowledge-intensive and capital-intensive industries.

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

MODEL OF PERFECT COMPETITION AND ITS CHARACTERISTICS

Perfect competition- competition between manufacturers and sellers of goods, which takes place in the so-called ideal market, where there is an unlimited number of sellers and buyers of a homogeneous product, freely communicating with each other.

A perfectly competitive market is characterized by the following features.

1 . The firms' products are homogeneous, so consumers don't care which manufacturer they buy it from. All goods 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, no matter how small, increase in price by one manufacturer above the market level leads to a reduction in demand for its products to zero.

Thus, non-price competition on this there is no market, and the difference in prices may be the only reason for preferring one or another company.

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 gain monopoly power in the market. The market price is the result of the joint actions of all buyers and sellers.

3. Freedom of entry and exit on the market. There are no restrictions or barriers - no patents or licenses are required to limit activities in this industry, significant initial capital investments, positive effects of scale in production are extremely insignificant and do not prevent new firms from entering the industry, there is no government intervention in the mechanism of supply and demand (subsidies, tax benefits, quotas, social programs, etc.).

Freedom of entry and exit presupposes absolute mobility of all resources, freedom of their movement geographically and from one type of activity to another.

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

These characteristics are so strict that there are practically no real markets that fully comply with them. Nevertheless, the model of perfect competition is an extremely important element of economic analysis. And here's why.

Firstly, the model allows explore markets that are close to competitive conditions, i.e. markets for relatively homogeneous products in which firms face highly elastic demand and can enter and exit the industry fairly freely.

Secondly, using the example of a competitive market, the main question facing any company is resolved: what volume of products should be produced to maximize its profit, i.e. what are conditions of economic equilibrium of the company.

And finally thirdly, the model of perfect competition allows us to evaluate the efficiency of real industries and degree their monopolization.

Under conditions of perfect competition, a firm offers only a small portion of the industry's output to the market.

Let's assume that a small farm is deciding how much area to allocate for sowing potatoes next year. Obviously, the farmer will proceed from the prices that prevailed on the market this year. And his decisions to increase or decrease his production will have no effect on the market price of the product, determined by the interaction of the total market demand And market supply the product in question.

A perfect competitor is in the market price taker and his individual demand curve is perfectly price elastic (Fig. 1). As can be seen in the graph, the market demand curve (D) decreases (Fig. 1. A), because the more potatoes there are on the market, the lower prices consumers are willing to buy them. Demand curve (d), that an individual firm deals with is a horizontal line because a competitive firm can sell additional quantities of the crop without reducing the price.

A perfectly competitive market is characterized by the following features:

The firms' products are homogeneous, so consumers don’t care which manufacturer they buy it from. All goods 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, no matter how small, increase in price by one manufacturer above the market level leads to a reduction in demand for its products to zero. Thus, the difference in prices may be the only reason for preferring one or another company. There is no non-price competition.

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

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

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

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

However, the perfect competition model:

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

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

Short-run equilibrium of a firm under perfect competition

Demand for a perfect competitor's product

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

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

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

The income of a firm that is a perfect competitor

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

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

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

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

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

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

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

By definition

All income functions are presented in Fig. 4.2.

Rice. 4.2. Competitor's income

Determining the optimal output volume

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

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

There are two interrelated methods for determining the optimum point:

1. Total cost - total income method.

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

n=TR-TC=max

Rice. 4.3. Determining the optimal production point

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

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

dп/dQ=(п)`= 0.

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

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

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

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

2. Marginal cost-marginal revenue method.

Мп=(п)`=dп/dQ,
(n)`=dTR/dQ-dTC/dQ.

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

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

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

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

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

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

It is necessary to determine the optimal output volume.

Solution (1 way):

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

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

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

Solution (2 way):

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

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

Solving this equation, we got the same result.

Condition for obtaining short-term benefits

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

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

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

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

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

The following options are possible:

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

Positive economic profit

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

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

Negative economic profit (loss)

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

Zero economic profit

Condition for cessation of production activities

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

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

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

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

P>АВС,

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

If price equals average variable cost

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

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

Condition for termination of production

Let us prove the validity of these arguments.

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

In other words,

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

Interim conclusions for this section:

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

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

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

Short-run supply curve of a competing firm

By definition, supply curve reflects the supply function and shows the quantity of goods and services that producers are willing to offer to the market at given prices, at a given time and in a given place.

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

Competitor's supply curve

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

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

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

Example 2. Definition of a sentence function

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

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

Determine the supply function of a firm under perfect competition.

Solution:

1. Find MS:

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

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

2+(Q-2) 2 = Por

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

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

Q=S(P) at Pmin AVC.

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

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

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

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

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

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

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

Long-run market equilibrium under perfect competition

Long term

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

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

In the long term:

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

Basic assumptions of the analysis

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

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

4.9 Long-run equilibrium of a perfectly competitive industry

Mechanism for the formation of long-term equilibrium

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

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

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

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

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

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

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

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

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

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

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

Basic conditions for long-term equilibrium

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

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

Market supply in the long run

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

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

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

Fixed Cost Industries

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

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

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

Industries with increasing costs

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

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

P2=MR2=SATC2=SMC2=LATC2.

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

INDUSTRIES WITH DECLINING COSTS

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

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

External savings

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

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

TCi=f(qi,Q),

Where qi- volume of output of an individual company;

Q— the volume of output of the entire industry.

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

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