IN long term, as in the short run, the firm proceeds from the problem of profit maximization. To do this, she can, change all the factors, i.e. change your size. At a given price, the firm's profit will increase as long as each additional unit of output is cheaper than the previous one. In such a situation, the size of the enterprise and | | the volume of production can be increased, otherwise - reduced. Therefore, the initial condition for the long-term equilibrium of a perfectly competitive firm, as well as for the short-term equilibrium, will be the equality of marginal costs to price (marginal income), with the only difference being that here we mean long! urgent costs: LMC = MR(R). "\

If in the short run the company can work both with profit and with losses, then in the long run it is unprofitable! The firm will be forced to leave the market. At the same time, the long-term period allows new firms to appear in the industry. Thus, in the long run, the number of free

on the market can both decrease (in case of deterioration of conv

juncture) and increase (with its improvement). Moreover, in conditions of perfect competition, entry into the industry and exit from it are absolutely free. There are no legal, economic or administrative barriers on the way of new firms entering the industry. This is not only the absence of any kind of collusion, but also licenses, patents, lack of resources, etc. There are no barriers to the exit of any enterprise from the industry, if one wants to curtail its production or transfer it to another region.

In addition, any single firm must break even, i.e. its revenue must at least not be less than e' costs. Here it means All costs: both fixed and variable, since in the long run they determine the prospects for the development of the enterprise. If the price is too low to recover all the costs of the enterprise, then it should leave this production.

If the firm is profitable (Figure 7.12, the firm A), then its production becomes attractive to other manufacturers. New firms enter the market for this product, diverting part of the effective demand to themselves. The offer is increasing (S > S\), competition is intensifying. To successfully sell, this company is forced to reduce prices (R e < Р\). As a result, profits are reduced, and the influx of competitors is reduced. If prices fall below costs (Figure 7.12, the firm IN), firms will incur losses and leave the industry. As a result, competition will decrease, supply will decrease. (S < S^), prices will rise (R e > Pi), and firms will be able to make profits.

The process of entry and exit of firms will stop only when there is no economic profit. A firm making zero profits has no incentive to exit, and other firms have no incentive to enter (Figure 7.12, firm WITH).

Economic profit will be absent when the price coincides with the minimum of long-run average costs. Such a firm belongs to the "marginal" type (R= min LAC). This condition is the main one that determines the equilibrium of the firm in the long run.

It is important that in such a case the condition short run equilibrium- equality of marginal costs to price, i.e. the firm does not have incentives to increase or decrease output in the presence of a given size of a manufacturing enterprise - a given

the amount of fixed costs. In this case, the size of the enterprise is optimal: it produces products at the minimum value of long-run average costs.

Thus, the long-run equilibrium condition includes:

1. Short-term equilibrium condition: MS -MR(R).

2. Scale effect optimization: min LAC (Fig. 7.13).

From these two conditions follows the third, the main one, which includes the previous two: min LAC = R (MR).

6.2. Perfect competition. Equilibrium in the short and long run

A perfectly competitive market has the following characteristics:

1. A large number of firms operate in this market, each of which is independent of the behavior of other firms and makes decisions independently. Any firm in the industry is not able to influence the market price of the goods produced by the industry.

2. Firms in the industry produce the same (homogeneous) product, therefore, it is absolutely indifferent for buyers which product of which firm to purchase.

3. The industry is open to entry and exit of any number of firms. No firm in the industry is undertaking any opposition, as there are no legal restrictions on this process.

individual firm demand. Since, under conditions of perfect competition, a firm in an industry, within the limits of changes in its output, does not significantly affect the price of a product and sells any quantity of a product at a constant price, the demand for the products of an individual firm is absolutely elastic, and the demand curve of each firm is horizontal. In addition, each additional unit of a product sold will add to the firm's total revenue the same amount of marginal revenue equal to the price of the product.

Therefore, for an individual firm operating in a perfectly competitive market, the average and marginal revenues are equal to the price of goods P, i.e. MR \u003d AR \u003d P, so the demand curves, average and marginal revenues coincide and represent the same horizontal line drawn at the level of the price of the goods.

Equilibrium in the short and long run

According to rules 1 and 2 (see Topic 6.1), acting in each market structure, a firm, in order to maximize profits, must produce such a volume of goods and services q E, at which MR=MC(rule 2) and P > AVC(rule 1). But under perfect competition, the marginal revenue MR is equal to the average revenue AR and the price of the good, i.e. MR=AR=P.

So, operating in a perfectly competitive market, the firm maximizes profit if it produces such a volume q of goods at which marginal cost equals the price of the good, set by the market regardless of the actions of the firm.

This situation is shown in Fig. 13.

Rice. 13. Equilibrium in the short run

By producing Qe units of a good when MC = P, the firm maximizes its profit, and any deviation from this quantity reduces its profit. If the firm will produce Q1< Qe единиц товара, то цена товара (которая не меняется) станет превосходить предельные издержки, и фирма обязана в этих условиях увеличить производство, иначе она не максимизирует прибыль. Когда же Q2 >Qe, marginal costs begin to exceed the price and the firm needs to reduce output.

Note that at point E1 marginal cost MR is also equal to the price of good P, but at point E (rather than E1) price P exceeds the average variable costs AVC, i.e. rule 1 is satisfied. Hence, it is at point E, and not E1, that the firm has an equilibrium in the short run.

Supply curve in the short run. The market price of the item. Suppose that the initial price P under the influence of the market has increased to P e1 . As has just been shown, under these conditions, the firm will increase output to such a level Q e1 when the marginal cost is again equal to P e1 . Therefore, for any price Pi greater than AVC, the firm will produce so many units that the marginal cost MCi corresponding to that output equals Pi. But since the MC curve shows the value of marginal cost at any values ​​of Q, then the points of the MC curve and will determine the volume of production at all values ​​of the price, when MC \u003d P. In addition, according to rule 1, if the price of a product drops below AVC, then the firm will stop existence and Q = 0. But, as you know, the curve showing the ratio of the price of goods to the number of units of goods offered by the firm for sale is the supply curve.

This leads to an important conclusion: The supply curve of a perfectly competitive firm in the short run is the segment of the marginal cost curve above the AVC curve.(segment VK in Fig. 13).

If there are N firms in the industry, then supply curves can be constructed in a similar way for each of them. Then An industry supply curve can be obtained by horizontally summing the supply curves of individual firms.

The market price of a good under perfect competition is determined by the intersection of the industry's supply curve and the market demand curve. Although each firm in an industry does not significantly affect the market for a product, the collective actions of all firms in the industry (as reflected in the industry supply curve), as well as collective actions of households (as reflected in the market demand curve) can lead to shifts in supply and demand curves and a change in the equilibrium price . But at the new equilibrium price, each firm will strive to produce so many units of the homogeneous good that MC = P. With these outputs, the QS of the industry equals the market QD, and equilibrium occurs in the industry.

However, the amount of profit received is of great importance for the company. The firm makes a profit if the revenue per unit of output, i.e. AR, exceeds unit costs, i.e. ATS. But since AR=P, then this is equivalent to saying that the firm earns an economic profit whenever the market price of a good exceeds the average total cost, i.e. When P > ATS. So, depending on the value of the market price of the goods, three options are possible.

1. The price of goods is below the average total cost at the volume of production q when MC = P; in this case, the firm will have losses (Fig. 14a).

2. When the volume of production q, the price of the goods coincides with the value of the average total cost and the economic profit is equal to zero. The value of output in this case reflects the so-called break-even point (Fig. 14b). The level of instability is observed when the total costs are equal to the total revenue TC = TR or when marginal and average costs are equal (MC = ATC).

3. The price of the good is higher than the average total cost of producing q units of the good; in this case, the firm will have a profit (Fig. 14 c).

Rice. 14. Possible options equilibrium in the short run

Therefore, the firm, forecasting its activities, must determine the production volumes at which the minimum values ​​of ATC and AVC are achieved. They will serve as a guideline for the company's behavior in a given situation. market structure, allowing you to find the breakeven level and the moment of production termination.

Equilibrium in the long run

Over the long run, firms can adjust to various market changes. For a long run in a perfectly competitive market, the following conditions are characteristic:

1. Operating firms make the most efficient use of available capital equipment. This means that each firm in the industry, in all short-run periods, which together form the long run, maximizes profit by producing such a volume of output when MS = R.

2. There are no incentives for firms in other industries to enter the industry. In other words, all firms in the industry have an output corresponding to the minimum of average total costs in each short run and receive zero profit, i.e. SATC=P.

3. Firms in the industry do not have the opportunity to reduce total costs per unit of output and make a profit by expanding the scale of production. This is equivalent to the condition under which each firm in the industry produces a volume of output q * corresponding to the minimum of average total costs in the long run, where the LATC curve has a minimum.

It is important to note that since under perfect competition firms are free to enter and exit the industry, in long run equilibrium each firm will have zero economic profit.

(Materials are given on the basis of: V.F. Maksimova, L.V. Goryainova. Microeconomics. Educational and methodological complex. - M.: Publishing Center of the EAOI, 2008. ISBN 978-5-374-00064-1)

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

Under perfect competition, a firm cannot influence the price of the product it sells. Its only opportunity to adapt to market changes is to change the volume of production. In the short run, the number of individual factors of production remains unchanged. Therefore, the stability of the firm in the market, its competitiveness will be determined by how it uses variable resources.

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

The first rule states that it makes sense for a firm to continue functioning if, at the level of production reached, its income exceeds variable costs. The firm should stop production if the total income from the sale of goods produced by it does not exceed variable costs (or at least not equal to them).

The second rule states that if the firm decides to continue production, then it must produce such a quantity of output that marginal revenue equals marginal cost.

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

Firm equilibrium in the long run. The equilibrium conditions for a firm in the long run are:

• - the marginal cost of the firm must be equal to the market price of the goods;
• - the firm should earn zero economic profit;
• - the company is not able to increase profits by unlimited expansion of production.

These three conditions are equivalent to the following:

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

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

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

Income and profit of the company: economic and accounting, functions and sources of profit, growth factors

Millions of economic entities participate in the modern national economy, the purpose of which is profit. Among them are those that are commonly called economic agents - households, the state as a whole and its economic structures, banks, insurance and credit companies, individual enterprises and partnerships, joint-stock companies etc. The market economy has put forward its most effective form of organizing the functioning of economic agents - the firm. The main actor in the company is the entrepreneur.

First, profit is a fee for services entrepreneurial activity. Secondly, profit is a payment for innovation, for talent in managing a company. Thirdly, profit is a payment for risk, for the uncertainty of business results.

The economic content of profit is manifested in its functions. Three functions are usually called fundamental. This is a stimulating, distributive and indicator of the effectiveness of the enterprise. As already noted, the profit of the company as an economic category characterizes financial results business activities of enterprises. Profit - as the final financial result of the company's activities, is the difference between the total amount of income and the cost of production and sale of products, taking into account losses from various business operations. Thus, profit is formed as a result of the interaction of many components with both positive and negative signs. Let's take a closer look at these components.

The formation of economic profit is influenced, first of all, by the total (gross) income received in the course of entrepreneurial activity. Gross income is the amount of income received by the firm from the sale of a certain amount good.

where TR (total revenue) - total revenue;

Р (price) - price;

Q (quantity) - sold amount of goods.

Substituting formula (2) into formula (1), we get:

Thus, the amount of profit depends on the number of products sold, its price, as well as the total costs associated with the production and sale of products. Costs are the costs of producing and selling a product.

According to the types of costs, accounting profit and economic profit are distinguished.

The indicator of accounting profit is not without drawbacks. The main ones are the following:

• - there is no unambiguous and clear formulation of the concept of accounting profit in both domestic and foreign literature;
• - by virtue of the assumption of accounting standards different countries(and often within the same country for different enterprises) the possibilities of using different approaches when determining certain incomes and expenses, profit indicators calculated by different enterprises may not be comparable;
• - changes in the general price level (inflationary component) limit the comparability of data on profits calculated for different reporting periods.

The amount of profit reflected in financial statements, does not allow assessing whether the company's capital was increased or wasted during the reporting period, since the financial statements at the moment do not fully reflect all the economic costs of the enterprise to attract long-term resources.

From an economic point of view, the capital of an enterprise is multiplied when the economic benefits received by the enterprise from the use of long-term resources exceed the economic costs of attracting them (whether borrowed or shareholders' funds). The reverse is also true: if the received economic benefits are less than the estimated value of the "cost of capital", the enterprise is actually wasting capital. This provision is actively used in investment analysis and by the majority of investors when making investment decisions, including decisions to acquire shares in a particular enterprise.

However, it should be noted that it is currently impossible to obtain such information directly from the financial statements. In other words, the enterprise can be profitable according to the data accounting, but "eat up" your capital.

The existence of the concepts of "accounting" and "economic" profit does not mean the possibility of a direct comparison of their values. Each indicator has its own scope. It seems more correct to characterize them as complementary ways of analyzing the activities of economic entities

The market mechanism of perfect competition. Firm balance. Producer surplus, consumer surplus and trade-offs

The products of firms are homogeneous, so that consumers do not 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 the price of 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 preferring one or another firm. There is no non-price competition.

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

Freedom to enter and exit the market. There are no restrictions and barriers - there are no patents or licenses restricting activity in this industry, no significant initial investment is required, the positive effect of scale of production is extremely small and does not prevent new firms from entering the industry, there is no government intervention in the supply and demand mechanism ( subsidies, tax incentives, quoting, social programs and so on.). Freedom of entry and exit implies the absolute mobility of all resources, the freedom of their movement territorially and from one type of activity to another.

Perfect knowledge of all market participants. All decisions are made in certainty. This means that all firms know their income and cost functions, the prices of all inputs, 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 would fully satisfy them.

However, the perfect competition model:

• allows you to explore markets where a large number of small firms sell homogeneous products, i.e. markets similar in terms of conditions to this model;
• clarifies the conditions for profit maximization;
• is the standard for evaluating the performance of the real economy.

Producer surplus represents that of a producer. Producer surplus is the difference between the market price and the marginal cost of output. Marginal cost refers to the minimum price at which a firm would be willing to produce each additional unit of output at all. Graphically, this surplus can be shown as the area above the supply curve, up to the market price line (shaded area in Figure 1).

The concepts of consumer surplus and producer surplus can be used to assess the effects of government pricing policy. Let us assume that the state fixes the price of some commodity at the level P1 below the equilibrium price P0 (see Fig. 2). From the previous discussion, we know that this leads to a shortage (Q2-Q1), because when the price decreases, the quantity demanded increases, but producers reduce production.

Market Mechanism imperfect competition Keywords: pure monopoly, natural monopoly, antitrust regulation

Modern market economy is a complex organism huge amount a variety of industrial, commercial, financial and information structures interacting against the backdrop of an extensive system legal regulations business, and united by a single concept - the market. The main features of a pure monopoly:

• - one seller in the industry (industry and firm are the same);
• - a unique product is produced (there are no close substitutes);
• - Barriers to entry of other firms into the industry are so powerful that entry into the industry is blocked.

All this taken together explains why a pure monopoly has maximum power over the market.

Under a natural monopoly, competition is impossible, but it is not needed. Natural monopolies are either subject to economic regulation by the state (USA and Great Britain) or state-owned (most European countries). In both cases, the state sets prices for products natural monopolies, while it is desirable that P = MC (as in pure competition). But since this is impossible, therefore, they strive to establish P = AC. State regulation natural monopolies is designed to imitate the work of the market, that is, to set the price at the level of P=MC=AC;

The equilibrium of the firm is the position of the firm in which it has no incentive to change the price of its product and the volume of output.

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

a) Under perfect competition.

In conditions of pure competition, the demand for the product of one firm will be perfectly elastic, since the share of each firm in the market is so small that it cannot affect either the market price or the market output. Therefore, the demand curve for the firm's product is always horizontal.

The firm's supply will be represented by a marginal cost curve. And since, under perfect competition, price, marginal revenue, and average income are equal, then we can derive the condition that the firm is guided by when choosing the volume of production, i.e. P=AR=MR=MS.

Moreover, this rule is valid both in the short term and in the long term. In a short-run equilibrium, a competitive firm can make a profit or a loss. Consider various options short-term equilibrium in fig. 3.1.

On fig. 3.1 a and 3.1 b show firms that have a profit: fig. 3.1 and - the firm has economic profit, fig. 3.1 b - the firm has normal profit. In these cases, the firm fully covers the costs, has a profit and wants to maintain this position for as long as possible. On fig. 3.1 in and 3.1 d shows firms that have losses. Moreover, if the firm in Fig. 3.1 g covers its current costs (i.e. the cost of raw materials, materials, wages workers), AVC costs are less than the price, it can hope for a price increase in the future and stabilization of its position, then the firm in Fig. 3.1 does not even cover its variable costs and is forced to close.

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

Rice. 3.1

In the long run, the firm's equilibrium condition can be written as:

MR=MS=AC-R,

i.e., in the long run, the firm receives only a normal profit, since under conditions of free entry and exit from the industry and the availability of complete information about the product from producers and buyers, other firms attract too high profits into production. And unprofitable firms leave the industry or go bankrupt, and then the industry is in equilibrium: no profits, no losses (see Figure 3.2).

Let us now consider the opposite situation, when there is only one seller of a product in the market that has no substitutes.

b) In a monopoly

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

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

Fig.3.2

Figure 3.2 shows how the monopolist determines the price Pm and output Qm, and what would be the price Pc and output Qc under perfect competition, where Pc=MC.

On fig. 3.2 equilibrium of the firm-monopolist maximizing profit is presented. The output Qm is the one at which the marginal revenue curve intersects the marginal cost curve, and the monopolist's price will be the price corresponding to this volume. Then the conditions for maximum profit under monopoly conditions are:

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

• 1) the monopolist does not set the maximum possible price that he would like to receive;
• 2) follows from the previous one: the monopolist avoids the inelastic section of the demand curve when choosing a decision on sales volume and price (try to prove by a numerical example that while МR>0, demand is elastic and the gross income curve is increasing, and vice versa, as soon as МR

Rice. 3.3

3) under the equilibrium of firm MS<Рm. Этой разницей иногда пользуются для определения степени монопольного влияния фирмы с помощью индекса Лернера:

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

It should be noted that a monopoly position in itself does not guarantee that a firm will always receive a positive profit. The situation shown in Fig. 3.3 b, when buyers do not want to pay such a price for products that would provide the monopolist with the cost of producing these products. In this case, the volume of production Qm, at which MC = MR, provides the monopolist with minimization of losses.

For a long-run monopoly firm, it expands its operations until it produces a quantity equal to marginal revenue and long-run marginal cost.

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

c) In conditions of monopolistic competition.

After analyzing the equilibrium conditions for firms in the opposite situation, i.e. pure competition and pure monopoly, which are extremely rare in real life, one can easily analyze the equilibrium of firms that exist in real life.

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

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

The short-term equilibrium of the firm is described by the rule МR=МС, graphically it (equilibrium) is presented in fig. 3.4 a and 3.4 b, where, similarly to the previous analysis, a profit-maximizing firm (Fig. 3.4 a) and a loss-minimizing firm (Fig. 3.4 b) are shown.

In the long run, any firm producing a product under monopolistic competition can expand by building new or larger facilities, but the economic profits will attract competing firms into production in the long run. As the supply of a good increases, the price of the good will fall. The long-run equilibrium (Figure 3.5) is similar to the equilibrium under perfect competition: no firm will earn more than normal profit.

Rice. 3.4

Rice. 3.5

In reality, however, the firm's equilibrium situation is much more complex than presented in the previous analysis, since the firm, in order to maximize profits, must manipulate three variables: price, product, and promotional activity. Question to decide: what is the optimal combination and how can competitors affect it?

d) in an oligopoly.

It is impossible to unambiguously determine the equilibrium of an oligopolis firm due to the specificity of this market structure. There are three fundamentally possible options for the behavior of a firm in the oligopoly market:

• 1) Uncoordinated oligopoly - a variant of a broken demand curve and price rigidity.
• 2) Collusion (cartel) of firms, on which the principle of maximizing joint profits is based.
• 3) Leadership in pricing - the situation of directive prices.

Let us consider in more detail the main types of oligopolistic situations.

1. Situation of uncoordinated oligopoly

The name itself suggests that there is uncertainty between the rivals in relation to each other due to the lack of an agreement. Firms in the industry believe that if they raise the price, rivals will not follow them, and demand in this case will be very elastic, and vice versa, if firms lower prices, then competitors will follow their pricing policy and also lower prices, then demand will become inelastic .

Under these conditions, the demand curve takes on a strange broken shape at the price point, as shown in Fig. 3.6.

Fig.3.6

This model explains the relative rigidity of prices under an oligopoly. Any increase in prices by one firm may cause other firms not to follow, and therefore it will lose its customers. Lowering the price in order to increase sales will not lead to the desired results, as competitors can lower prices and maintain their market share.

2. Cartel.

This situation is most often characterized by a secret collusion between the participants. And then the variant of behavior in setting the price and sales volume will be similar to the situation of pure monopoly, where the demand curves of firms merge into one. The price is set at a level that provides maximum profit for all contracting companies. Further, the profit is divided on the basis of determining the quotas of each in the total production volume.

3. Pricing leadership is a compromise between uncoordinated oligopoly and collusion.

In practice, this situation is observed everywhere. One firm, usually the largest, acts as the price leader and sets the price to maximize its own profit. The rest of the firms in the industry begin to accept the leader's price as given. And then this model can be represented as a partial monopoly. However, in order not to upset the balance, the leader often "probes" the attitude of competitors, setting prices that would suit everyone else.

In addition to these situations, one can single out pricing that limits entry into the industry. In this case, firms set prices so as not to maximize current profits, but to maximize long-term profits by preventing new sellers from entering the market.

income accounting financial balance sheet

The time intervals during which at least one factor of production remains constant are called short-term periods in the activity of the enterprise, and the time intervals during which all factors are variable are called long-term periods. Short-term and long-term periods mean different conditions in the activities of the enterprise. Therefore, the laws of production efficiency are formulated separately for each of them. These patterns are essential for the dynamics of both the physical volumes of output and the cost characteristics of production.

Firm equilibrium in the short run

In the short term, when fixed assets do not change, but only variable factors (labor, raw materials, materials) change, it is important to compare total and marginal costs with the firm's income. As a result, conclusions are drawn about the optimal production volume, maximum profit and minimum losses. In particular, it makes sense for a firm to do business if total revenue exceeds total cost, or if total cost exceeds total revenue by less than fixed cost, or, finally, when the price of the product equals average variable cost. The firm will maximize profit when total revenue exceeds total cost by the maximum amount. Losses will be minimal at such a volume of production when total costs are minimally higher than total income and they are less than fixed costs. The firm incurs the minimum loss if the price is higher than the average variable cost but less than the average cost. If the price is less than the average variable cost, then it is better to stop production.

On fig. 2.1 shows three possible options for the position of the firm in the market.

Rice. 2.1 Position of a competitive firm in the market

If the price line P only touches the curve of average costs AC at the minimum point M (Fig. 2.1 a), then the firm is only able to cover its minimum average costs. Point M in this case is the point of zero profit. This does not mean that the firm does not receive any profit at all. Production costs include not only the cost of raw materials, labor, but also the percentage that the company could receive on its capital if it invested it in other industries. That is, the normal profit is determined by competition in all industries with the same level of risk, or the reward of the entrepreneurial factor is an integral part of the costs. As a rule, the factor of entrepreneurship is considered as a constant factor. In this regard, the normal profit is attributed to fixed costs.

If the average costs are lower than the price (Fig. 2.1 b), then the firm at certain production volumes (from to) receives an average profit higher than the normal profit, i.e. excess profit - quasi-rent.

If the average cost of the firm at any volume of production is higher than the market price (Fig. 2.1 c), then this firm suffers losses and goes bankrupt, as described above, it is better to stop production.

The equilibrium condition of the firm, both in the short run and in the long run, can be formulated as follows:

MS = MR. Any profit-seeking firm seeks to establish a level of production that satisfies this equilibrium condition.